Insurer’s duty of utmost good faith: damages for non-disclosure

The decision in Banque Keyser Ullman S. A. v. Skandia (U. K. ) Insurance Co. Ltd, is not only most interesting but also new in insurance law. A number of banks lent sizeable amounts of money under different agreements to one Ballestero, with the security of credit insurance policies as the prime security. One of the terms of these loan agreements was that binding contracts of insurance should exist before the money would be advanced. Although, in principle, the insureds were companies controlled by Ballestero in effect the banks were the insureds.

This was due to the fact that, either they were named on the policies as a co-insured or because they were assignees of the benefit of the policies. Moreover, all of these policies had incorporated an exclusion clause for loss arising directly or indirectly from fraud. After this succeeding insurances were effected and loans were disbursed, but later on it was discovered that Ballestero was absconding and the money was not traceable.

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The banks claimed on the basis of these insurance policies but later on they acknowledged that the fraud exclusion applied.

Consequently, they claimed damages from the insurers. Their claim in respect of the first loan was deemed to have failed, as the judge refused to accept that the banks would have called it in if they had been told of the non-disclosure by the senior underwriter. However, damages were awarded for the subsequent loans. The reason for this was that the insurers were vicariously liable for their underwriter's negligent failure to disclose to the banks, and Steyn J.

rejected the argument that the case was one of pure oversight, in respect of which a duty of care in negligence is absent, on the ground that an existing relationship of good faith and fair dealing was present between the parties.

This decision does not seem to be wrong, because it cannot be gainsaid that the insurers were under a duty of disclosure. Furthermore, the very wellspring of the doctrine of disclosure in insurance law, namely Lord Mansfield's judgment in Carter v. Boehm , is unambiguous in its contention that such a duty applies to both parties to the insurance contract.

Since, the intervening years, have not witnessed any concrete illustrations of a meaningful application of the duty to insurers , this case is therefore one in which a landmark decision was taken. As an example, let a particular case be considered wherein A proposes to insurance his goods on transit to a particular country and the proposal being for the insurer's standard policy with war risks exclusion, since the possibility of a war does not seem to exist at that time. The insurer issues the policy despite having been informed by its superior news intelligence services that war in that country is in the offing.

A being unaware of these developments, despatches the goods and it is too late to stop the despatch of these goods, by the time that A does discover the situation obtaining in that country and these goods are lost due to the war. In this case even though the exclusion applies, the insurer is deemed to be guilty of a material non-disclosure which has exposed the insured to loss. It is evident that this could be interpreted in wider terms than a pre-contractual duty to disclose material facts and it could be used as a basis for preventing the insurer from relying on exclusion.

In Banque Keyser Ullman v.Skandia, it would have been unnecessary to hold that a non-disclosure is actionable in damages if the court could have unequivocally stated that the insurer was precluded from taking recourse to fraud exclusion. For example, if it is assumed that a motor insurer promises, that its insureds' no claims bonuses will be protected if no more than a certain number of claims are made over a five year period, then if on renewal the insurer fails to honour its promise or fails to renew at all, despite an insured not having had more than the stated number of claims, traditional analysis would be incapable of providing the insured a remedy.

Since, most insurance contracts are of limited duration and renewals are totally new contracts, the right to renew is non existent. A few other examples of the duty of good faith in insurance law imposed on an insurer are to be found in the literature. Further, there are other circumstances which could be visualized, for example, it might be argued than an insurer who failed to take account of the Statements of Insurance Practice by relying upon an innocent non-disclosure was in breach of his duty of good faith and fair dealing; this would be one means by which the Statements could in effect be given the force of law.

The relatively lesser number of insurance litigation cases in the UK signifies that the development of a general duty could entail quite some time to happen. Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) In this case two points of law were involved. First, the insured may have breached section 39(5) of the Marine Insurance Act 1906, which provides, in a time policy, that if a ship, which is not sea worthy, is sent to sea and this is known to the insured, then insurer is not liable for any loss consequent to such un seaworthiness.

Secondly, section 17 of the Marine Insurance Act 1906 is in breach and this imposes a duty of utmost good faith on both parties to the insurance contract, and describes the remedy for its breach. In November 1989, the insurance cover for 40 vessels belonging to the Kollakis group, with the Star Sea being one of them, was renewed for a further period of one year. In November, the vessel Star Sea was examined for defects and accordingly, her cargo ship safety certificate was renewed. On the 27th of May, 1990, she sailed from Nicaragua bound for Zeebrugge.

During her voyage a fire started accidentally in the engine-room workshop and the crew attempted to douse the fire whilst transmitting distress signals. Unfortunately, the ship’s crew did not accept the help of the first ship that responded to their call, believing that they had successfully controlled the fire. However, in the evening it was realized that the fire was still burning. In Bilbao, where this ship was towed two days later, it was realized that the failure to extinguish the blaze had damaged the vessel to such an extent that it was considered to be a constructive total loss (CTL).

The ship owners proffered a claim on the insurance policy in respect of both a partial loss and a CTL and both of these claims were defended. The insurers claim was that there had been a breach of section 39(5) of the MIA, which nullified their liability for the CTL of the vessel. They further, contended that by concealing certain information relevant to their claim, the insured had breached section 17 of the MIA, and that therefore the insurer was not liable for either claim. In respect of the insurer’s appeal under section 39(5), their Lordships dismissed.

Both the court of first instance and the court of appeal, had accepted that the insured did not have actual, direct knowledge of the un seaworthiness of the vessel. Nevertheless, the insurer maintained that the insured was guilty of blind-eye knowledge or in other words despite suspecting a defect the insured had deliberately refrained from investigating further in case this proved to be correct! Their Lordships were in agreement that knowledge must mean more than negligence, in whatever form, and that there was insufficient evidence of that as per the facts. Therefore, the section 39(5) defence had to fail.

The meaning and scope of the duty of utmost good faith, enshrined in section 17, states that, "A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party. " It is argued by some, especially those who favour the restriction of the section 17 duty that, whilst the duty of utmost good faith is mutual, Lord Mansfield had the insured's pre-contractual duties in mind whilst establishing the duty of good faith, at least in respect to insurance contracts .

The obligations of the insurer in this context, whilst they exist, are superficial and are applicable to no more than the general mercantile principle of fair dealing. Moreover, this line of thinking implies that this implies that the insured's pre-contractual duties relating to misrepresentation and disclosure are likely to cause many problems, and that if section 17 can be interpreted to imply nothing greater than this, then this section need not be given much cognizance and can altogether be ignored.

The courts have accepted that the content of the duty changes from stage to stage of the contract. If the doctrine of utmost good faith is expanded in order to combat fraud, then the greatest risk that may result is that the courts will be forced to sanction in their judgments total avoidance of the contract for something less than fraud. In insurance law such innocent misrepresentation or non-disclosure is meted out the same treatment and in the same manner as the fraudulent, at least as far as the remedy for breach.

Irrespective of the fact as to whether the other party is culpable or not, the remedy is avoidance by the innocent party and differentiation between them is impossible as provided by the statute at present. The statute has to be re written and this is a consummation devoutly to be wished for, however, the majority of the authorities are not in favour of this being done in isolation and would not re-write it in such a manner.