This article considers the current law of rescission as it applies to insurance contracts, and asks to what extent an insurer handling a claim and, in particular, an insurer seeking to avoid an insurance contract, on the ground of misrepresentation or non-disclosure by an applicant, is affected by the underlying doctrine of good faith.

“You get Justice in the next world; in this world you have the Law.” 1

Basic contract law reflects the apparent “reluctance of courts … to enforce transactions that are very unequal, or very disadvantageous to one of the parties, unless the other party appears to have a sufficient interest in enforcement”.2 At first flush one might be surprised that there should be any reluctance to rescind contracts, where the “rules” of rescission can be satisfied. On second thoughts, however, it is quickly apparent that not only is the underlying policy of the law different in the two situations (enforcement and rescission) but some of the “rules” of rescission are not as clear as one might wish, particularly in the world of commerce.

In the world of insurance, the effect of misrepresentation or non-disclosure by an applicant for insurance is that the insurer’s apparent consent to the insurance contract is flawed. Rescission is the remedy at law to negate that effect. An award of “contractual” damages is possible in theory.3 However, no case of such an award has been reported and any right to damages in tort, or for non-disclosure as such, has been rejected. In practice, if not entirely in theory, the insurer’s remedy lies in rescission: avoidance of the contract. The insurer is allowed to plead the flaw in consent as a defence to an action on the contract of insurance, or actively to rescind the contract and thus resile from what had apparently been agreed.