Good Faith and Insurance Contracts

Peter MacDonald Eggers and Sir Simon Picken

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CHAPTER 1 The insurance contract uberrimae fidei

Introduction

1.01 In April 1760, a French man-of-war of 64 guns and a frigate of 20 guns audaciously raided and overran Fort Marlborough on the island of Sumatra. The attack was executed presumably in the milieu of the Seven Years’/Third Carnatic War. The Governor had foreseen the risk of an attack and considered it prudent to insure against this contingency. The seizure of the fort led to the presentation of a claim under the policy against the insurers. Six years later, the 18th-century champion of commercial law in the City of London, Lord Mansfield CJ,1 took the opportunity while presiding at Guildhall over the disputed claim to express his view on the principle of good faith, which he declared to be applicable to “all contracts and dealings”,2 although the case before him concerned only an insurance policy. 1.02 The Lord Chief Justice identified the two most common varieties of a lapse in good faith: inducing a person to enter into a contract by making false representations or by withholding information that may be of relevance to that person in deciding whether to entertain the bargain.3 Lord Mansfield thus focused on the inequities created in any contractual relationship caused by a misrepresentation or by concealment or non-disclosure. The principles of misrepresentation have remained universally applicable to all contracts in English law. To this extent, at least, the requirement of good faith is given the backing of the common law in all contracts.4 The daring hope that the prohibition of non-disclosure extended to all contracts has not been realised.5 This judgment of Lord Mansfield in Carter v Boehm is the fountainhead of many varied and often ingenious submissions, arguments, pleadings and decisions that have sought to apply, extend or abridge the duty of good faith,

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commonly in the context of insurance contracts.6 The common law duty has developed in this way and is the origin of the duty enshrined in the codifying legislation of the Marine Insurance Act 1906. Concerns about the rigour of the duty and the remedies available for breach led calls for reform, which resulted in the passage of the Insurance Act 2015 (entering into force on 12 August 2016). The 2015 Act qualifies the common law duty and the remedies available for the failure to observe the duty. 1.03 The principle has been known as or referred to or distinguished by many an epithet7 – uberrimae fides/uberrimae fidei,8 utmost good faith,9 absolute good faith,10 greatest good faith,11 most perfect good faith,12 honour,13 bad faith.14 All have this in common: the language is notoriously emotional and difficult to define in any legal sense.15 Accordingly, the courts have provided structure to the principle as applied to insurance contracts, by identifying rules and prohibitions that apply as a matter of law, or, in some circumstances, equitable doctrines, all in the name of good faith. The development of the duty of good faith therefore is at odds with the disinclination of the courts to recognise a general obligation applicable to all contracts requiring the parties to exercise good faith in all situations.16 1.04 The reference to good faith implies that the parties shall approach their enterprise without bad faith,17 that is without any dishonesty or deceit and, possibly, making all that

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is known to them known to the other. The use of such an emotive term helps to identify the boundaries of the rules alluded to above. As Steyn J (as he then was) stated in Banque Financière de la Cité v Westgate Insurance Co Ltd (sub nom Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd),18 which saw the duty of good faith analysed from various angles: “the rubric in which a rule is placed often has an important influence on its width of application and future development”. 1.05 Lord Mansfield focused on the duty as it applied before the contract was made. Good faith, however, is not only relevant to the making of the contract, but also to its performance and the treatment of any breach. As we shall see, the law has been developed with some specificity in connection with the pre-contractual duty and the formation of the contract. It is only relatively recently that good faith has been invoked regularly in the parties’ dealings after the contract is made, although the application of the duty of utmost good faith to post-contractual matters has been doubted.19 Similarly, the duty has been the constant refrain of an insurer singing the breaches of an assured. The mutuality of the duty and its content when it sits on the shoulders of the insurer (and the consequences of its breach) have not been defined and so its sphere of application is not certain. Indeed, under the Insurance Act 2015, the duty of utmost good faith has been severely curtailed with the result that, whilst there may remain a duty on the part of the insurer, there are no prescribed remedies or consequences for a failure to observe that duty on the insurer’s part. Where the duty of utmost good faith remains uncertain, it may be that we need to look elsewhere for inspiration, either to other jurisdictions or other areas of the law. 1.06 There are a number of contracts that may be described as requiring utmost good faith, the most established category being the insurance contract.20 Indeed, in the context of insurance, the duty of good faith cannot be said to exist separately from the insurance contract.21 The fact that at common law an assured and an insurer are bound by duties of good faith is so obvious as to be beyond doubt.22 This is a principle that extends to all classes of insurance.23 However, recent legislation has altered the universality of this duty in two

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respects. First, under the Consumer Insurance (Disclosure and Representations) Act 2012, there is in effect no general duty of utmost good faith at the time of placing as understood at common law; there is instead only a duty upon the assured to exercise reasonable care in making representations to the insurer. Secondly, the Insurance Act 2015 prescribes a duty of utmost good faith upon the assured and remedies for breach of that duty, but whilst it retains the notion of the duty of utmost good faith, it does not prescribe any remedies for a breach of the insurer’s duty, having abolished a general remedy of avoidance for any breach of the duty of utmost good faith by either party. 1.07 In the case of ordinary commercial contracts (that is, other than contracts that have been categorised as uberrimae fidei in whole or in part), the decrees of good faith have not been applied to their full extent. Indeed, for such contracts, the law has put the responsibility on the parties to obtain all relevant information surrounding the undertaking before entering into the contract, as opposed to entitling them to expect such information to be provided to them by the other party. As the Court of Appeal stated in Banque Financière de la Cité v Westgate Insurance Co Ltd (sub nom Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd):24

“The law cannot police the fairness of every commercial contract by reference to moral principles. It frequently appears with hindsight, as in this case, that one contracting party had knowledge of facts which, if communicated to the other party, would have protected him from loss. However, subject to well-recognised exceptions, the law does not and should not undertake the reopening of commercial transactions in order to adjust such losses.”

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