The Continuing Duty of Good Faith Flashcards
What is the continuing duty of good faith?
An insurer is bound, before the contract is entered into, to disclose to the proposer anything he knows that goes to reduce the risk from the level at which the proposer wrongly believes it stands.
The duty also exists during the contract, but only in relation to facts that are material to the risk insured.
Carter v Boehm 1766
Lord Mansfield, in Carter v Boehm 1766, gave the example of someone wishing to insure a ship that was known to the insurer already to have safely arrived at its destination.
*Bank of Nova Scotia v Hellenic Mutual War Risk Association (Bermuda) Ltd (“The Good Luck”) [1992]
A ship owner insured a ship. The owners took out a mortgage in relation to the ship with the plaintiff bank and in addition to taking out the mortgage in favour of the bank, the owner’s assigned the benefit of the insurance policy to the bank. The insurance company undertook to notify the bank if the insurer’s ceased to insure the ship. The ship owners, in breach of warranty, traded the vessel into a war zone. The ship was then hit by a missile and it sunk. The insurers failed to advise the bank when they became aware of the breach of warranty - the bank had advanced further sums to the ship owners on the basis of the mortgage which they wouldn’t have made if they had known the ship was no longer insured. So the bank sued the insurance company for breach of the undertaking.
⁃ The court held that the insurer owed the bank a continuing duty of good faith and it was obliged to warn the bank that its security was prejudiced (by the fact the insurance was no longer valid). So the insurer was liable to the bank for the extra sums advanced by the bank after the point in time when they should have advised the bank of the issue with insurance cover.
- Held: as soon as the breach occurs the insurer is prospectively freed from any obligation to pay out.
Is there a duty on the insured to disclose to the insurer any circumstance that has developed since the inception of the policy which increases the risk?
By contrast, there is no common law duty on the insured, during the course of the policy (as opposed to the period prior to and at inception of the contract and at the time of renewal), to disclose to the insurer any circumstance that has developed since the inception of the policy and which increases the risk. However the policy may have a specific term requiring such disclosure to be made.
Manifest Shipping Co Ltd v Uni Polaris Shipping Co Ltd (“The Star Sea”) [2001]
Lord Hobhouse (at paragraph 38): “It is not necessary to disclose facts occurring, or discovered, since the original risk was accepted material to the acceptance and rating of that risk. Logic would suggest that such new information might be valuable to the underwriter … but it need not be disclosed”.
