Good Faith and Insurance Contracts

Peter MacDonald Eggers and Sir Simon Picken

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CHAPTER 18 Evidence: Proving a breach of duty or a defence

The onus of proof

18.01 The assured must satisfy the court or tribunal that is hearing his claim that he has suffered a loss that falls within the cover afforded by the terms of the policy of insurance. The assured need not prove that he has complied with the duty of the utmost good faith, whether it concern the pre-contractual duty of fair presentation of the risk or the presentation of a claim. The burden of proving the breach of such a duty, whether it be a non-disclosure,1 a misrepresentation2 or a fraudulent claim,3 lies on the insurer. This

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onus will not shift to the assured merely because he has declared or warranted that his representations or any specific representation or his answers to the questions put to him by the insurer are true4 or that he has withheld no material fact.5 18.02 Indeed, the onus lies on the insurer to prove, if it be in issue, that the assured consented to any condition that rendered the accuracy of any representation by the assured a condition of the contract6 and similarly that such a warranted fact is untrue (assuming that such a condition or warranty is now valid).7 However, if the assured wishes to rely on section 11 of the Insurance Act 2015 to disable the insurer’s defence based on such a condition or warranty, the assured will have to prove that the non-compliance with the condition or warranty could not have increased the risk of the loss that actually occurred in the circumstances in which it occurred, provided that the condition or warranty does not define the risk as a whole and that compliance with the condition or warranty would tend to reduce the risk of loss.8 It seems unlikely that a pre-contractual representation that is the subject of such a condition or warranty will satisfy the conditions of section 11, because compliance with such a condition or warranty would not tend to reduce the risk of loss as required by section 11(1) of the Insurance Act 2015. If the insurer demonstrates that he asked the assured a question designed to elicit a material response, but no response is given, it may be said that a prima facie case of non-disclosure is made out, and the onus will transfer to the assured to demonstrate that there has been no concealment, for example by proving that the fact was communicated to the insurer or his agent9 or that the insurer waived disclosure.10 Occasionally, the fact withheld is so material that it would offend common sense to suggest that the prudent insurer would have subscribed to the policy if he had been informed of the material fact; in such a case, it may be said that the onus will be transferred to the assured.11 Equally, where the insurer makes out a prima facie case of fraud, in the making of a claim, the burden of proof will shift to the assured and if the assured fails to answer the case, the insurer will have established his allegation of fraud.12 18.03 However, where the assured has been accused of fraudulently procuring a loss otherwise covered by the policy, the burden that lies on the assured to prove that the loss is covered by the policy remains.13 If the wilful procurement of the loss is consistent with the

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scope of cover, the assured need prove nothing more. Such is the case where the insured peril is fire, which includes a fire deliberately started.14 However, where the cover is inconsistent with a deliberate loss, such as “perils of the sea” that connotes a fortuity, the assured must on the balance of probabilities exclude the possibility of deliberate loss15 and the insurer must demonstrate that the loss was not accidental or fortuitous.16 Once the prima facie case of coverage is made out, the insurer must demonstrate that the assured has been guilty of fraud.17 18.04 To prove a breach of the duty of fair presentation of the risk, the insurer will have to establish that the assured failed to disclose relevant information or that the assured made a representation, that the facts withheld or misrepresented were within the assured’s knowledge, if relevant, and material, the meaning of any representation, and that any representation was untrue.18 Where the materiality of the fact in question is obvious and speaks for itself, there is no need for the insurer to prove its materiality; the assured must, if he

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can, disprove it.19 It may also be that there is no need for evidence of materiality where the circumstance in question is the subject of a question in a proposal form or by the insurer20 or where fraud is established.21 Of course, there is no need for evidence of materiality where the parties to the insurance contract have agreed to render the fact or representation in question material by agreeing that it should form the basis of the contract,22 although such basis clauses are now prohibited by section 6 of the Consumer Insurance (Disclosure and Representations) Act 2012 and section 9 of the Insurance Act 2015. 18.05 The onus will be on the assured to prove that one of the exceptions to the duty of disclosure23 has been established.24 Where the assured seeks to argue that the duty of full disclosure has been waived or modified in any way, such a waiver not being apparent from the contract itself, the assured will have to sustain the onus of establishing his contention.25 Similarly, the assured will have to be able to establish that any breach of the duty, as proved by the insurer, has been waived by the insurer or that the insurance contract has been affirmed.26 18.06 By section 4(1)(b) of the Consumer Insurance (Disclosure and Representations) Act 2012 and section 8(1) of the Insurance Act 2015, in order to be entitled to a remedy for the consumer assured’s misrepresentation or the non-consumer assured’s breach of the duty of fair presentation of the risk, the insurer must prove that without the misrepresentation or breach, that insurer would not have entered into the contract (or agreed to the variation) at all, or would have done so only on different terms. Moreover, the insurer will bear the burden of proving that the relevant misrepresentation or breach of duty was deliberate or reckless, if the insurer wishes to avail itself of the remedies for such deliberate or reckless conduct.27 The insurer may be assisted in discharging the burden of proving inducement,28 by the nature of the breach and factual inferences drawn by the court or tribunal,29 and where the assured or the broker has been proved to be guilty of fraudulent conduct calculated to influence the

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insurer.30 However, in principle, the burden of proving inducement remains with the party alleging a breach of the duty of the utmost good faith.31 Where the underwriter gives evidence on inducement, it will invariably involve considering a hypothetical position, namely what the underwriter would have done had the assured complied with the duty of fair presentation of the risk. The court has suggested adopting a healthy scepticism to such evidence,32 especially where there is no contemporaneous documentary evidence to assist the court.33 18.07 Where the assured wishes to prove a breach of the duty of good faith as it rests on the insurer, the comments above should be read mutatis mutandis. This is now pronounced in the case of the assured’s claim for breach of the implied term imposed by section 13A of the Insurance Act 2015 requiring the insurer to pay insurance claims within a reasonable time. However, the prospects of any other breach of duty by the insurer being amenable to a practical remedy have been reduced by the abolition of the right to avoid for any breach of the duty of utmost good faith34 and the current absence of any alternative and meaningful remedy for such breach. 18.08 If the insurer wishes to make out a case of breach of the duty of the utmost good faith or if the assured wishes to run a case that exonerates his position, such allegations must be pleaded.35 Any failure to plead the point might be ruinous to the case being run. It is submitted, however, that where fraud is in issue, so as to bring into question the probity or honesty of a person, the court should be prepared to allow as much leeway to the party impugned to plead such points as may seek to excuse himself. On the other hand, where a party wishes to allege fraud, or indeed any breach of the duty of the utmost good faith, that party should seek to plead the case of fraud as early as the circumstances allow.36 Indeed,

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if the insurer is unable to particularise such a plea, the defence on this basis will be struck out so that the insurer will be deprived even of disclosure that might assist him in his pleading;37 the insurer must be able to plead and particularise his defence based on fraud or indeed any breach,38 before disclosure may be ordered. Of course, the insurer will be entitled to put the assured to proof of his recoverable loss, but the insurer will not be permitted to contend a positive case of fraud, or indeed any breach of the duty of the utmost good faith, without an adequate pleading of the case.39 The line between running an affirmative case of fraud and requiring the assured to prove his case is not always clear.40

The standard of proof

18.09 The standard of proof applicable in cases of the breach of the duty of the utmost good faith, or any defence thereto (such as affirmation), is the satisfaction of the court or tribunal that the case has been established on the balance of probabilities.41 The probability to be proved, however, will increase in the case of an allegation of fraud or, where fraud has been established, an allegation that the fraud failed to induce the insurer.42 It is sometimes said that the standard of proof in cases of fraud will approach the criminal standard of proof beyond a reasonable doubt.43 This serves merely as a comparison. The reality is that the civil standard of probabilities remains applicable, but the likelihood of an assured having been fraudulent is such,44 and the danger of injury to his reputation,45

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that the evidence required to prove must be clear and persuasive.46 That is, the degree of probability to be satisfied will be higher, depending on the gravity of the allegation and its relation to the issues in the matter and the consequences that would follow for the person impeached.47 However, there is no necessary connection between the seriousness of an allegation and the improbability of it being true such that the improbability of a particular fraud will depend on a consideration of all of the circumstances of the case.48

Means of proof

Expert evidence

18.10 Materiality is defined in the context of the duty of full disclosure by reference to the wish of a prudent underwriter to consider the circumstance in question in order to decide if it might affect his decision to underwrite the risk on any particular terms. This is a question of fact,49 and introduces an element of objectivity that is assessed by the standard of reasonableness. Reasonableness may be determined by the court or tribunal seised of jurisdiction applying its own sense of the attitude of a prudent underwriter,

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particularly in cases of obvious materiality,50 or, more commonly, especially in cases of “novelty or doubt”,51 by relying on the independent evidence of the opinion of a person sufficiently acquainted with the insurance market in question,52 such as an underwriter or broker. Expert evidence is not essential to prove materiality,53 but he who argues that a fact is material must be ready to adduce such evidence or trust his luck to the skill, knowledge and disposition of the judge or indeed his own certainty that the fact is obviously material. The court may draw assistance from such evidence, but is not bound to accept it,54 especially where the expert testimony on behalf of the assured and the insurer are equally persuasive.55 The court would require good reason to dispense with uncontradicted expert evidence.56 Indeed, in many cases, the court will not treat materiality as proved unless independent evidence of materiality is adduced,57 except in cases where the judge could apply his own judgment to his own knowledge of insurance matters.58 In Mundi v Lincoln Assurance Ltd,59 Lindsay J said that:

“In this case no expert insurance evidence has been called. Each side had permission to adduce expert evidence in the field of life insurance but neither side exercised that right. Materiality is thus left to me as the trier of fact unaided (nor impeded) by expert evidence on the subject.”

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