TOPIC
IS THE PRINCIPLE OF UTMOST GOOD FAITH RELEVANT IN THE FORMATON OF THE INSURANCE CONTRACT?
By
Samuel Baah-Boateng
CONTENT
1.0 Objectives and Reasons
2.0 Introduction
3.0 History and Definition
4.0 The Principle Of Utmost Good Faith; Significance To Insurance
5.0 What is Material Fact?
6.0 Test of materiality
7.0 Conclusion
8.0 Reference
1.0 OBJECTIVES AND REASONS
This research sets to find out
· The history and definition of utmost good faith
· The rationale of the principle
· The defense of the principle
· The Way forward
2.0 INTRODUCTION
Insurance contracts belong to the special type of contracts based on mutual trust and reliance (contractus intuinae personae) where the principle of utmost good faith (uberrima fides) is applied 1. This means, in simple terms, that the insurer and the person who is applying for insurance have the duty to deal honestly and openly with each other that lead up to the formation of the contract. The duty of utmost good faith (uberrima fides) is central to the buying and selling of insurance. This duty may also continue whilst the contract is in force. Under this principle, the concealment of any material facts of which the other party was ignorant was prohibited in insurance contracts and the breach of this duty entitled the aggrieved party to avoid the contract entirely.
3.0 HISTORY AND DEFINITION
The “good faith” in insurance is well over 200 years old. During that time, it has been codified into status and subjected to attacks and criticisms at various times. Some say that in modern commercial practice, the duty of good faith is honoured more in the breach than the observance. Others believe that it may be an anachronism in a modern age of remorseless commercial pressures, instant communication and hybrid transaction. Nevertheless, it survives through occasional criticisms that harsh judgments make bad law and create uncertainty.
Lord Mansfield is credited with first articulating this concept in Carter v. Boehm (1766)2. This concept can be defined by the words of Lord Mansfield in Carter v. Boehm (1766): “Insurance is a contract of speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the assured only: the underwriter trusts to his representation and proceed upon the confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risqué as if it does not exist”3.
At the beginning of the 20th Century, the English Courts was still saying that it is still an essential condition of an insurance contract that the underwriters shall be treated with good faith, not merely in reference to the inception of the risk, but in the steps taken out to carry out the contract 4.
4.0 THE PRINCIPLE OF UTMOST GOOD FAITH; SIGNIFICANCE TO INSURANCE
In every contract in general, both parties owe no positive duty towards each other beyond showing good faith. A policy of insurance is a contract of “utmost good faith”. ‘Good faith’ here signifies good intention and due care and caution. This emanates from the right of every person to know about every material fact associated with the subject matter of the contract and there is no escape from this. This follows the maxim caveat emptor (let the ‘buyer beware') as under the Sales of Goods Act, 1930
Generally, the rationale behind certain class of contracts requiring the parties to have duty of disclosure lies in two fold 5. First in such class of contracts, one of the parties is presumed to have means of knowledge which are not accessible to the other. In insurance contract the insurer knows nothing about the person who comes to get insured however the person who wants to get insured knows everything about himself and risks that he has in his life. Second, some class of contract may involve parties who are not at all at par with each other and that one party may have some advantage over the other, either economically or with other resources, thus in place of commercial relationship trust and confidence should be in place, requiring higher degree of honesty and disclosure of information.
Hence, the principle of utmost good faith under which the duty of disclosure in insurance contract is applied bases itself to the principle of equity as well as more simpler idea of common sense whereby it is only natural that the information that one party knows but not the other should be disclosed in case where that piece of information can affect the consent of the parties entering into the insurance contract. For this reason, even though Lord Mansfield only talks about insured’s duty of disclosure, such duty also lies on the insurer 6.
Hansell (1985: 147) defines utmost good faith as “….each party to a proposed contract is legally obliged to reveal to the other party all information which could influence the other’s decision to enter the contract whether the contract whether such information is required or not.” Therefore failure to reveal any vital, material or relevant information even if not asked, gives the aggrieved party the right to regard the contract as void 7.
Reinecke (2002: 112) also states that the duty of utmost good faith is pre-eminently concerned with pre contractual negotiations between the parties and has more specifically a close relationship with the Duty of Disclosure 8.
The obligation to observe utmost good faith gives rise to 2 duties on the party proposing insurance:
· a duty to disclose all material facts to the insurer;
· a duty not to misrepresent material facts to the insurer.
Contracts of insurance are within a special class of contracts known as contracts of utmost good faith 9. So it is utmost importance that both the insurer and the assured are bound to volunteer to each other to disclose before the contract is concluded. In Black King Shipping Corporation v. Massie 10, the requirement of utmost good faith to apply throughout the contract was discussed and the court held it in the affirmative. The duty of disclosure arises again when a contract is being renewed, since in law a new contract is formed.
The original rationale behind the duty of disclosure is apparent from the early leading case of Carter v. Boehm. There is of course, no doubt that some facts remain solely in the knowledge of applicants as in the case of Rozanes v. Brown 11. However, it has been suggested that there is no longer such an imbalance of knowledge, especially where consumers are concerned. For example, an insurer may have a better knowledge of the incidence of burglary or flooding in an area than a consumer who has only recently moved there 8. For this reason, even though Lord Mansfield only talks about insured’s duty of disclosure, such duty also lies on insurers.
A misrepresentation is a positive assertion of fact that is erroneous or incorrect, whereas non-disclosure refers to a failure to disclose or concealment of a fact. A partial answer can in certain circumstances amount to a misrepresentation. Misrepresentation in an insurance contract results when one party to the contract makes a misleading statement during the negotiation leading to the formation of the contract. It may be, for example, that the applicant for insurance answers a question on the proposal form incorrectly. However, mere silence does not constitute a misrepresentation 12. For instance suppression of material facts can render that which is stated false, when the facts are known to the person making the statement or possibly if he or she has the means of knowledge 13.
5.0 WHAT IS A MATERIAL FACT?
Another problem arises as to the definition of the term material fact. What may be material for one may be immaterial for the other and vice-versa. Material fact is defined as that fact whose disclosure “would have had an effect upon the mind of a notionally prudent insurer in estimating the risk” 14.
But, generally speaking, a material fact is one which affects the judgmental capacity of a person. It must be such that a different consequence would have occurred had it not been disclosed.
The duty to disclose extends in principle to all facts which are material therefore immaterial facts need not be disclosed. The question is not simply whether a reasonable person would regard the information as affecting the risk, but whether, in the opinion of a reasonable person, the information could affect the ‘reasonable insurer’s’ 15 decision as to whether to accept the risk or charge a higher premium than usual.
All material facts should be disclosed before the contract is concluded. Material non-disclosure or misrepresentation entitles the insurer to avoid the contract ab initio if the insurer was induced to enter into the insurance contract by the non-disclosure or misrepresentation: Pan Atlantic Insurance Co. Ltd v. Pine Top Insurance Co. Ltd. 16.
6.0 TEST OF MATERIALITY
The test of materiality is not what the insured considers material, nor what a reasonable insured would consider reasonable, but whether the fact would be taken into account by a prudent insurer when assessing the risk and determining an appropriate premium.
In order to establish materiality and inducement, it is necessary for an insurer to adduce evidence from underwriters that the non-disclosure or misrepresentation was material and did induce the contract. The insurer must show at least that, but for the non-disclosure or misrepresentation, the policy would not have been concluded on the same terms. It is not necessary, however, to show that it was the sole effective cause. The issue is one of fact. Frequently, expert evidence will also be called on the issue of materiality.
The duty to disclose extends in principle to all facts which are material therefore immaterial facts need not be disclosed. The question is not simply whether a reasonable person would regard the information as affecting the risk, but whether, in the opinion of a reasonable person, the information could affect the insurer’s decision as to whether to accept the risk or charge a higher premium than usual.
7.0 CONCLUSION
Thus, the principle of utmost good faith forms an integral part of insurance contract. It gives a fair chance of risk assessment to the insurer and also ensures that the assured fully understands all the terms and conditions of the contract. But this principle is more favourable to the insurer as it is the assured who has to generally make all disclosures. This is primarily because when this doctrine was evolved in the 18th Century, the insurance market was in its infancy and thus required protection. However, the enactment of the English Unfair Contract Terms Act, 1997 has considerably alleviated the position of the assured who is now protected against unfair contractual terms. Further, the Insurance Act lays down that an insurance policy cannot be called in question two years after it has been in force. This was done to obviate the hardship of the insured when the insurance company tried to avoid a policy, which has been in force for a long time, on grounds of misrepresentation. However, this provision is not applicable when the statement was made fraudulently. Nevertheless, technological advancements have further made it possible for both parties to see to it that their interest is taken care of.
But, there are several other grey areas to this doctrine as well. There is still no clear cut distinction between as to what is material or immaterial and the same is largely dependent on the whims of the insurers and the terms of the contract. It is still very easy for an insurer to repudiate the contract on the slightest point of non-disclosure by treating them as warranties, thereby putting the assured in an even difficult position.
Another problem is with regards to as to what duration does the disclosure(s) need to be made. Common law cases may somewhat seem to have settled this point. However, all these problems need to be taken care of and an effective solution must be provided considering the principle of utmost good faith is one of the fundamental principles associated with insurance contract.
8.0 REFERNCES
1 For the common law position governing the general law of contracts see,e.g., Keates v. Cadogan, (1851) 138 Eng. Rep. 234. For a review of the policy considerations underlying the general contractual position see J. BEATSON, ANSON’S LAW OF CONTRACT 263-64 (28th ed. 2002).
2 Carter v Boehm (1766) 3 Burr 1905, 1909
3 3 Burr. 1905, 1909 (1766)
4 Boulton v. Houlder Bros & Co (1904) 1KB784 @ 791
5 See for detail, Beatson supra note 5 at pg 264, Merkin supra note 3 at pg 115-118
6 See the detail Birds, John, Modern Insurance Law, Sweet & Maxwell, Third Edition 1993 pg 112-117, Merkin supra note 3 at 125-127 Srinivasan, MN Principles of Insurance Law Life-Fire-Marine-Motor and Accident, Wadhawa & Company 8th Edition 2006 pg 219-220
7 Hansell D.S. (1985) The Elements of Insurance 4th edition. Pitman
8 Reinecke M.F.B. , Shaik Van Der Merwe, Niekerk J.P. and Havenga P. (2002) General Priciples of Insurance Law
9 John Birds, Modern Insurance Law, 4th Edition, Sweet and Maxwell, 1997 at 100
10 (1984) 1 Lloyds Rep. 437, Cited from Ibid at 101
11 Rozanes v. Bowen, (1928), 32 L.I.L.R. 98
12 Keates v. Lord Cadogan 10 C.B. 591 (1851) cited in id. at pg 237
13 Sindell v. Cambridgeshire C.C. 1 W.L.R. 1016 (1994) cited in Beatson supra note 5 at pg 238 For example, a seller of the land told a purchaser that all the farms on the land were fully let, but omitted to inform him that the tenants had given notice to quite. Thus such representation of the fact was found to be a misrepresentation.
14 Kent, Michael QC, Current Issues in Insurance Law, Material Non-Disclosure: Proportionality, Good Faith and Reasonableness, Crown Office Chamber 2005
15 Test of prudent and reasonable insurer was conclusively adopted for non-marine insurance purposes in Lambert v. Co-operative Insurance Society 2 Lloyd’s Rep. 485 (1975)
16 Pan Atlantic Insurance Co. v Pine top Insurance Co. Ltd, 3 All E. 581 (1995)
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