This article is written by Raslin Saluja, from KIIT School of Law, Bhubaneswar. The article attempts to analyse the implementation and the impact of the principle of utmost good faith in the English insurance laws.
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The doctrine Uberrimae Fidei derives its origin from the formation of a contract of insurance under English law. Unlike the usual contracts in the legal landscape, the law of insurance in England revolves around the principle of Uberrimae Fidei, Latin for the principle of utmost good faith. The principle in its ordinary sense means the highest honesty, fair dealing and without any intention to defraud another person. This first very basic and primary principle of insurance has brought about long-standing debates on whether it brings equity and fairness among the contracting parties.
Insurance contracts and the principle of ‘utmost good faith’
Generally under common law, there is no duty/obligation on a party to contract to disclose any material information and ordinarily failure to disclose such information will not give a right to the party to avoid the contract as the principle of caveat emptor applies excluding the contract of sales. Nevertheless, certain contracts specifically require disclosure of facts, one such example of this rare species of a contract is a contract of insurance. An insurance contract is one for discharging indemnification liability by the insurer for premium considered tendered by the insured to the insurer. In simple terms, where one person promises another to indemnify their loss based on some contingent happening in exchange for a consideration known as premium. An insurance contract is based on seven principles namely:
- Principle of insurable interest;
- Principle of indemnity;
- Principle of contribution;
- Principle of subrogation;
- Principle of loss minimization;
- Principle of causa proxima; and
- Principle of utmost good faith.
For the purposes of this article, we focus specifically on the principle of utmost good faith. According to this principle, both the parties (i.e. the insurer and insured) must sign the contract of insurance with absolute good faith or belief or trust. It essentially means that the person getting insured must at his own will disclose and surrender to the insurer his complete true information regarding the subject matter of insurance.
This helps the insurer in determining and analysing the undertaking and potential liability that the insurer would hold in regard to the subject matter of insurance. The insurer’s liability gets void (i.e. legally revoked or cancelled) if any facts, about the subject matter of insurance, are either omitted, hidden, falsified, distorted or presented in a wrong manner by the insured. The insurer’s liability exists only on the sole assumption that no material fact has been concealed/falsely presented by the person getting insured. In practice, the facts that need to be disclosed include:
- The facts that increase the risk level than usual.
- Any facts that increase the probability of loss.
- Any kind of previous claims or loss.
- Any facts that reduce the subrogation rights of the insurer.
- Facts relating to the existence of other policies.
- Any facts relating to the description of the subject matter of the insurance.
The facts that are not required to be disclosed include:
- Facts of law.
- Facts that the insurer by common means should know, like common knowledge, current affairs.
- Any facts that lessen the risk like security fittings, sprinklers, alarms.
- Facts related to insuring’s survey.
- Facts that the insurer should have noticed from the other information given by the insured like if the proposer has referred to other records.
- Facts relating to policy conditions.
- Any convictions which have been covered or spent under the “Rehabilitation of Offenders Act 1974”.
Though exercise of good faith is expected by both parties, the insured seems to have more responsibility for disclosing the facts since the insurer is dependent on those facts and if those are wrong/misrepresented, the insurer will end up paying for false claims. This affects the insurers as well as other people involved in the pool whose premiums will be wrongly utilized in payment of false claims.
Utmost good faith under English law
The concept of (subjective) good faith has long been familiar in English law in the sense of honesty which can be reflected in the context of negotiable instruments and the sale of the property. However, the idea of a general doctrine of good faith, in the sense of a requirement of fair dealing, was not part of the lexicon of English contract law until quite recently. It underwent a legislative overhaul and has moved away from the strict common law position. Under English law, there exists a duty of good faith only in insurance law, which was created in the context of the rapid development of maritime trade in the UK. However, as of today, its most recent version enshrined in the Consumer Insurance Disclosure and Representations Act (2012) and Insurance Act, 2015 is abolished with the aim to reform the century-old principles as found in the Marine Insurance Act (1906).
The classical origination dates back to the eighteenth century, traceable to Lord Mansfield who in the case of Carter v Boehm (1766), stated that the governing principle of “good faith” was applicable to “all contracts and dealings”. However, the duty to “all contracts” was overlooked by the English courts who only applied this concept on insurance to impose a very comprehensive duty of disclosure on the insured. The courts have generally refused to recognize such a duty in the context of commercial contracts. This concept changed with the recent case of Yam Seng Pte Ltd v International Trade Corporation Ltd (2013), in which the High Court ruled that any “hostility” of the English courts towards adopting a general duty of good faith in contracts is misplaced.
In the Court’s conclusion after having found support from various precedents for the implication of obligations of good faith in commercial contracts, it was stated for long term distribution agreements, a general duty of good faith should be implied between the parties. Another example of its implementation is the case of Bristol Ground School Ltd v Intelligent Data Capture Ltd (2014), wherein a contract under which the parties had cooperated with each other on manufacturing training manuals for commercial airline pilots, a duty of good faith was implied.
Thus, it can be observed that the Court is developing to incorporate the principle of good faith in the overall application of commercial contracts under English law though the same is not being followed in all common law jurisdictions. Therefore, keeping aside the contract of insurance, under general circumstances the parties are not bound by any obligation of good faith under the English law, although except in the law of tort for one party to be held liable of negligence, there must first be a duty of care, which implies acting honestly. This has been the ratio of the judgment in the case of Esso Petroleum v. Mardon (1976), where the court held the defendant liable for providing incorrect information under the tortious remedy of negligent misstatement.
The good faith exercised here is of a higher standard than in general contract laws as the insurance contracts are one of speculation. Therefore, the term “utmost good faith” is used in insurance contracts. The parties are required by law to voluntarily disclose the information. There is also the remedy to breach of such contracts which renders the contract terminated upon breach which might not necessarily contribute to the loss. With regard to misrepresentation and non-disclosure, except the fact that in misrepresentation the court has the discretion to award damages in lieu of rescission while in non-disclosure the court has not, the distinction between misrepresentation and non-disclosure may not be material.
Duty of disclosure
It has been observed, this duty of disclosure is to continue throughout the contract. The situations in which the insured owes a post-contractual duty of utmost good faith may well be confined to some categories. These categories at least include that the insured should avoid making any fraudulent claim or any other fraudulent acts and that the insured owes a duty of disclosure in any situation in which the insured is required to give information to the insurer under the terms of the policy (e.g., where there is an increase of risk). This duty can also be extended in reference to the terms of the policy.
Insured’s duty of disclosure
The law never requires the insured to disclose what he is not able to know, but it is complicated as to whether the insured should disclose what he “ought to” know. In marine insurance, Section 18(1) of the Marine Insurance Act, 1906 (U.K.) provides that an insured is “deemed to know every circumstance which in the ordinary course of business ought to be known by him”. Although, it is said that the 1906 Act has stated the rule applicable to both marine and non-marine insurance, the Court of Appeal has decided that the constructive knowledge, or the deemed knowledge, does not apply to private insurance. The duty of disclosure-only extends to those “material” circumstances. The requirement for materiality is set up in Section 18(2) of the 1906 Act as “Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk”.
Positive outcome or pessimistic results
Though under the English law, Section 17 of the Marine Insurance Act of 1906 codifies the duty of both insurer and insured to act in good faith, failing which contract can be avoided, in practice the 1906 Act was mostly relied upon by insurers to avoid the contract for non-disclosure of information and misrepresentation. The Act had been a backbone for all marine and non-marine contracts but it is reflected in the light of being unduly harsh on insureds and seemed redundant for the rapid developments taking place.
When the new law in the form of the Consumer Insurance (Disclosure and Representations) Act 2012 was enacted, the aim of it was to safeguard the customers by offering more proportionate remedies to insurers in cases where there was innocent/negligent non-disclosure or misrepresentation. This was followed by the Insurance Act, 2015 which essentially replaced the duty of utmost good faith with a new duty of fair presentation of the risk for a business insurance contract. This was with the intention that the English courts will now use the principle as a shield rather than a sword.
At the one end of the spectrum, it can be observed that there were certain problems with the application of the good faith principle under English law. Under several instances, parties demanded remedies for breach of the duty of good faith, but the court gave their judgments without following a specific reference to a fixed set of rules pertaining to good faith thereby raising ambiguities and inconsistencies. Furthermore, in cases where parties argue that a term of good faith has to be implied in the contract, it would be required to meet the strict test for implied terms as decided in Marks & Spencer Plc v. BNP Paribas Securities Services Trust Company (Jersey) Ltd (2015).
On the contrary, it has been suggested that there has been some progress under the English law towards the development of this rule, specifically with the adoption of the Directive on Unfair Terms in Consumer Contracts which contains various references to the doctrine. However, there is not much judicial advancement in this area. In addition to it, there are also debates over which standard is universally acceptable. For instance, the English courts could choose to apply standards based on theories of commercial principles, fair play, objectivity and fairness. For those cases, the courts will have to depend on tort like standards that are external to contract between the parties. While in other cases, the courts might depend on the situations and aims of the contracting parties reflected in the contract. This would require the courts to interpret the contract between the parties and then accordingly decide on the standard to apply.
The above discourse discloses that even though the genesis of the duty of disclosure in the fabric of insurance law was primarily to elevate the involvement of the parties to the contract by way of one party’s volunteering his/her known facts which are unknown to the other, the duty ultimately led to the one-sided development affecting severely the insured and leaving him helpless. Though the element of reciprocity in the character of the duty has often been resounded repeatedly in academic writings as well as in judicial writings, it is yet to be exercised in practice in its true spirit.
In Walford v. Miles (1992), despite the fact that parties had agreed to act in good faith, the English court denied any duty to contract in good faith. For Lord Ackner, such a duty of good faith would be ‘unworkable in practice ’. The ‘pragmatic thesis’ by Brownsworth proposes that the good faith doctrine is also catered to by the English common law by providing piecemeal solutions for specific cases thereby cancelling the need for a worldwide accepted good faith doctrine. Judges of the English courts argue against accepting a requisite of fairness or ‘adequacy,’ by stating that they only are concerned with the adequacy of contracts. Yet this orthodox position articulated in Walford v. Miles contravenes the belief that parties have the freedom to introduce fair terms into the contract.
A general principle of good faith was supposed to alleviate injustice but due to the absence of a predominant specific doctrine of fair and honest dealing, it creates legal insecurity. This is the result of a misunderstanding of the supportive nature of the contractual agreement on the unbiased community morals of fairness and trust. The real difficulty for English courts has been as if they are trapped in finding a principle of general application.
With the introduction of new legislation in the UK that aims to reform insurance law, the draconian remedy for avoiding breaches of duty of good faith has either abolished the onerous duty for consumers or made it less treacherous for businesses depending on the cases. Moreover, the non-insurance realm witnessed some development following the Yam Seng decision, even though this remains unsettled. The overall discussion however indicates that there is the scope for several teething problems. Nevertheless, those changes must be welcomed in light of some of the issues that arose with the preceding version of the duty of good faith under English law.
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