The assured’s duty of utmost good faith

Sections 18 and 20 of the Marine Insurance Act 1906 contain the basic rule that the assured must desist from making false statements and disclose only material facts. A fact is material if it influences the judgment of a prudent insurer in either calculating the premium or in his decision to accept or reject the risk. This stance was established by the Court of Appeal in Assicurazioni Generali v Arab Insurance Group . It held that even if the declaration was untrue, inducement was lacking.

Inducement requires that the effective cause for an insurer or re insurer to enter into the contract should be a false statement. However, if can be proved that the insurer would have contracted on the same terms irrespective of the circumstances, then the representation or non-disclosure would not comprise an effective reason for the making of the contract. Hence, the insurer or re insurer cannot avoid the contract. The Insurers’ Duty of Utmost Good Faith.

Though Section 17 of the Marine Insurance Act 1906 states that the duty of utmost good faith is mutual, the rest of the Act is silent about anything which develops the scope of the insurers’ duty.

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Since, the only remedy is avoidance, which seldom favours the assured; the scope for an extensive pre-contractual duty is very less. Some illustrations are where the assured has been falsely led to believe that the policy covers risks which it does not, or if the risk insured against is to the insurers’ knowledge non-existent.

Nevertheless, in a number of recent cases there has been a development of a duty of utmost good faith imposed on insurers, the remedy has been recognized as being not avoidance but a prohibition on denying liability.

In Gan Insurance Company Ltd v. Tai Ping Insurance Company Ltd (Nos 2 and 3) a reinsurance agreement had incorporated a claims control clause which permitted insurers to decide whether or not to consent to any settlement. At first instance it had been accepted that this power had to be exercised reasonably.

This was reversed on appeal and the majority view was that reinsurers had to act for the right reasons without arbitrariness, and that refusal to accept a settlement was to be only for reasons based on the merits of the settlement itself. A breach of the duty of utmost good faith is a wrong acknowledged by the common law and, it is submitted, equity in its concurrent jurisdiction. In such cases, the court should be free to administer an adequate range of remedies to deal with the non-observance of good faith. Remedies for breach of the duty of disclosure.

At present law an insurer who is induced to enter a contract by an insured's non-disclosure of material information or material misrepresentation may completely avoid or rescind the contract. A trifling non-disclosure can result in the insurer avoiding liability causing substantial loss for the insured. The outcome of an innocent non-disclosure is similar to that for a wilful misrepresentation since rescission is the only remedy. The law in respect of disclosure is to be reformed so that more flexible remedies, apposite to the degree of fault of the party in breach could be implemented.

The right to avoid the contract is draconian in the extreme and it does not depend on fault of the party in breach of the duty. Hence, the marine insurance contract differs from the commercial contract in that, first, material facts have to be disclosed before the contract is concluded. Secondly, in contrast to misrepresentation, where the misrepresentee's remedies depend on whether the misrepresentation was made fraudulently, negligently or innocently; the remedy for non-disclosure is always rescission. Conclusion

Although rescission of the contract may be an appropriate for insurers, it is usually impractical for an insured who has suffered loss because of non-disclosure or misrepresentation on the part of the insurer. The Insurance Contracts Act 1984 has brought about significant reforms to the law in respect of remedies for non-disclosure or misrepresentation in non-marine and pleasure craft insurance. Section 28 of the ICA, states that, (1) This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into:

(a) failed to comply with the duty of disclosure; or (b) made a misrepresentation to the insurer before the contract was entered into; but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into. (2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.

(3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made. Although some doubts exist as to whether section 28(3) of the ICA permits an insurer to make its liability nil if it is able to prove that it would have accepted the insured’s proposal if the latter had complied with the duty of disclosure.

However, several decisions have accepted that an insurer may reduce its liability to nil as was argued before the High Court in Unity Insurance v Rocco Pezzano . In this case, Kirby J referred to the decision in Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd, which confirmed that the insurer could reduce its liability to nil under section 54 of the ICA and stated that the same principles appear to apply under section 28(3) .

The common law obligation of disclosing material facts has been so overly developed in the insurer's favour that it appears to the insured to be an overwhelming engine of oppression. The landmark cases of C. T. I. v. Oceanus purpose seems only to remind the insured of how weak and inferior his position is in reality. Furthermore, any statutory intervention along the lines of the English Commission's recommendations presently appears rather remote . Therefore, from this perspective, the Australian case of Barclay Holdings v. British National Insurance ushers in a long overdue judicial development.

It is submitted that the appellate judges' discernment of the insurer's reasoning process, from the initial investigative stage to the critical decision-making stage, is worthy of consideration, since it displays a more progressive and positive approach on how one should view the application of the test of materiality. Hence, it remains to be seen, whether or not the Barclay decision will find its way into the English, but nevertheless, this case demonstrates that the seemingly immutable principle as pronounced in the C. T. I. judgment can and has been, successfully challenged, thereby instilling hope in the insured.

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MIA s 90(3) provides that `where the policy is void, or is avoided by the insurer as from the commencement of the risk, the premium is returnable, provided that there has been no fraud or illegality on the part of the assured'. 30. Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) (2001) UKHL 1; (2003) 1 A. C. 469 (HL) 31. Marine Insurance Act 1906, s 18(3); applied to non-marine insurance by the decision of the Court of Appeal in Lambert v Co-operative Insurance Society (1975) 2 Lloyd’s Rep 485 CA 32. Merchants' and Manufacturers' Insurance Co. Ltd. v. Hunt (1941) 1 K.

B. 295 33. Pan Atlantic Insurance Company Limited v. Pine Top Insurance Company 2 Lloyd’s Rep 427 (1994). 34. Pan Atlantic Insurance Co. Ltd. v. Pine Top Insurance Co. Ltd. (1993) 1 Lloyd's Rep. 496, C. A. 35. President of India v. Lips Maritime Corporation AC 395 (1988). 36. Rix LJ in Drake Insurance v. Provident Insurance, Q. B. 601 (2004). 37. Roberts v Avon Insurance (1956) 1 Lloyd’s Rep 240, Barry J. 38. Rookes v. Barnard AC 1129 (1964). 39. Roselodge v Castle (1966) 2 Lloyd's Rep 113 40. Report No. 104 by the Law Commission, "Non-disclosure and warranties in insurance law", 1980, Cmnd.

No. 8064; the report of the National Consumer Council, "Insurance Law Reform", 1997. 41. Reynolds v. Phoenix [1978] 2 Lloyd's Rep. 22 and 440 42. Section 17 of the Marine Insurance Act 1906 43. Section 18(1) of the Marine Insurance Act 1906. 44. Steyn J. , relying on Lord Wilberforce in Anns v. Merton London Borough Council [1978] A. C. 728 at pp. 751-2. 45. Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [1990] VR 919, 927-8 46. Unity Insurance v Rocco Pezzano (1998) 192 CLR 603. 47. Woolcott v Sun Alliance (1978) 1 All ER 1253.