The Utmost Good Faith

Question 1

What does it mean when we say that insurance is a contract “uberrimae fidei”?

Answer 1

Insurance is a contract “uberrimae fidei” or involving the utmost good faith [Life Association of Scotland v Foster (1873) per Lord President Inglis at 359. The application of this principle to consumer insurance contracts is now restricted by virtue of s 2(4) of Consumer Insurance (Disclosure Representations Act 2012).].

Question 2

What is a consumer insurance contract?

Answer 2

A consumer insurance contract is an insurance contract entered into between an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession (i.e. the consumer insured) and a person who carries on the business of insurance and who becomes a party to the contract by way of that business (i.e. the insurer): section 1.

Question 3

Marine Insurance Act 1906 s 17:

Answer 3

“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.”

Question 4

What are the three primary components of the duty of good faith?

Answer 4

These are primarily relevant prior to the insurance contract being concluded:

1) The duty of disclosure
2) Duty not to misrepresent
3) No fraudulent claim

Question 5

What is the duty of disclosure?

Answer 5

⁃ This is an obligation on the insured to make full and accurate disclosure of all material facts that would influence the judgment of a prudent underwriter - Joseph Fielding Properties (Blackpool) Ltd. v Aviva Insurance Ltd. [2010]

Question 6

When does the duty of disclosure exist?

Answer 6

The duty of disclosure only exists:
⁃ at the negotiation stage
⁃ until the contract of insurance is formed and
⁃ when the policy comes up for renewal

Question 7

Is the insurer under a duty to disclose?

Answer 7

The insurer is also under a duty to disclose. Such a duty arises in relation to facts that are material to the nature of the risk insured or the recoverability of a claim under the policy which a prudent insured would take into account in deciding whether or not to take out cover with the insurer. In such circumstances, the duty to disclose can arise during the subsistence of the insurance contract. (This duty can exist throughout the contract rather than simply up until the conclusion of the contract).

Question 8

What is the duty not to misrepresent?

Answer 8

There is a duty not to misrepresent material facts. In practice, representations are often elevated by insurers to the status of material contractual terms by a ‘basis of the contract’ clause in the policy but note the effect of section 6 of the 2012 Act on consumer insured contracts. The insurer must also prove inducement.

Question 9

What is the requirement not to make a fraudulent claim?

Answer 9

Where an insured makes a fraudulent claim, the insurer is under no liability to meet that claim.

Question 10

What must be disclosed?

Answer 10

Under the Marine Insurance Act s 18:
⁃ (1) The assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance[ So this broadens the duty to things the insured ought to know.] which, in the ordinary course of business, ought to be known to him.
⁃ (2) 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.

Question 11

What is judged as material in cases where the Marine Insurance Act does not directly apply?

Answer 11

Outwith the field of marine insurance (i.e. where the statutory provision doesn’t directly apply), there are two alternative interpretations as to what is material:
⁃ (1) whether the undisclosed fact would have had a ‘decisive influence’ on the prudent insurer; or
⁃ (2) whether the fact is one which would have had an ‘effect’ on the insurer’s mind.[ This is easier for an insurers to satisfy.]

NB materiality is judged at the time of formation of the contract, i.e. When the insurer accepts the risk.

Question 12

How are criminal convictions treated?

Answer 12

A particularly difficult issue is the effect of the criminal history or dishonesty of the insured. Criminal convictions for offences of dishonesty are normally treated as material, even those which have been committed some time ago [Schoolman v Hall [1951] - 15 years prior still material]. Although the insured is not obliged to disclose convictions which have been “spent” in terms of s4(3)(a) of the Rehabilitation of Offenders Act 1974. In North Star Shipping Ltd v Sphere Drake Insurance Plc it was stated that the insured is required to disclose allegations of serious criminal behaviour which have not yet led to arrest or charge, although Walker LJ criticised this rule. The information is clearly of a type which would influence the judgement of a prudent insurer in assessing the risk

Question 13

What was improved in Pan Atlantic Insurance Co v Pine Top Industries Co. Limited [1995]?

Answer 13

Interpretation (2) was approved by the HL (by a majority) in the case of Pan Atlantic Insurance Co v Pine Top Industries Co. Limited [1995]. So there is no need for an insurer to prove that a prudent insurer would have acted differently had he known of the fact in question. The insurer only requires to show that it was one factor out of several that the prudent insurer would have taken into account in making his decision to accept the risk and set the premium accordingly. This rule applies in relation to indemnity contracts in both Scotland and England, and in England applies to life assurance as well.

Question 14

How does the test in Scotland in the context of life assurance differ?

Answer 14

It is more favourable to the insured.

Question 15

Life Association v Foster 1873

Answer 15

In this case, prior to the insurance contract being entered into the insured had been asked if she’d had a rupture. She answered no. Shortly after she entered into the life assurance contract she died and it was discovered that she’d had a form of swelling which was strongly indicative of a potential rupture. The question was whether this swelling was a material fact that she should have disclosed to the insurer. It was held that what is material is determined in relation to what a reasonable insured would consider material - not what the prudent insurer would consider material. Mrs Foster had no medical knowledge and had otherwise answered the questions carefully; thus she couldn’t have known that this swelling was material, so the insurers had to pay out.
- So the duty in Scots law in the context of life assurance is framed by reference to what the reasonable man in the position of the insured would consider to be material, not what the prudent insurer would consider to be material [Cuthbertson].

Question 16

Hooper v Royal London General Insurance Co Ltd 1993

Answer 16

The insured had failed to disclose prior to the insurance contract (not a life assurance contract) being entered into that he’d been convicted of vandalism. Based on this nondisclosure, the insurer refused to pay out. The court upheld the insurer’s position - in the case of indemnity insurance, materiality of the circumstance is judged from the perspective of the prudent and reasonable insurer, not the reasonable insured.

Lord Justice Clerk Ross made it clear that this “reasonable insured” test (from Foster above) only applied to life assurance. Since they relate to personal matters which are often “peculiarly within the knowledge of the assured” and “are not capable of assessment on any objective basis”. [Contrast with indemnity insurance where the answers to the questions asked can be objectively ascertained.

Question 17

Cuthbertson v Friends Provident Life Office [2006].

Answer 17

A recent attempt to argue that the prudent insurer test should apply to cases of life assurance in Scotland as it does in England failed in the Outer House

Question 18

What are the origins of the duty of disclosure?

Answer 18

The origin of the rule in relation to the disclosure of physical and moral hazards is Carter v Boehm 1766

[Lord Mansfield: “Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the underwriter trusts to his representation and proceeds upon 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 risk as if it did not exist. The keeping back of such circumstance is a fraud, and therefore the policy is void. Although this suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived and the policy is void, because the risk run is really different from the risk understood and intended to be run at the time of the agreement”.].

Question 19

What is inducement?

Answer 19

If the insurers can show that a material fact has not been disclosed, this in itself is not enough: the insurer must also prove inducement (Pan Atlantic Insurance v Pine Top Insurance [1995]). So the non disclosure of the material fact must have induced that particular insurer to enter into a contract of insurance or to enter into the contract on the terms that he did.

⁃ In addition to proving misrepresentation, the insurer also has to prove inducement.
⁃ If the insurer can prove that he was induced to enter into the insurance contract due to the misrepresentation he can avoid the contract - see Marine Insurance Act, s. 17(1) and Joel v Law Union & Crown Insurance Co. [1908][ Same authority as for the “duty of disclosure”.]. The contract is voidable (provided that restitutio in integrum is possible). There is no right of damages. All sums paid out to the insured must be repaid to the insurer and the premiums returned/refunded by the insurer to the insured. The effect of misrepresentation is more severe on the insured than the insurer.

Question 20

What is the rebuttable assumption in St. Paul Fire & Marine Insurance Co (UK) Ltd. v McDonnell Dowell Constructors Ltd. [1995]?

Answer 20

There is, however, a rebuttable presumption which will arise that the insurer has been induced to enter into the insurance policy as a result of the insured’s non-disclosure of material facts.

Question 21

What is a “basis of contract clause”?

Answer 21

When taking out insurance a proposal form will have to be completed setting out what the risk is and the facts and circumstances in relation to the insured and the risks the item will be subject to.

This form will normally contain a “basis of the contract clause”.

Question 22

What is effect of the “basic contract clause”?

Answer 22

The effect of this is to turn all the statements made in the proposal form into warranties operating as a condition precedent to the right of recovery from the insurer. The consequence of a “basis of the contract” clause prevents any argument about the materiality of the answers to any of the questions posed in the form. However, note that in terms of section 6 of the 2012 Act – “basis of the contract” clauses of no effect in consumer insurance contracts.

Question 23

What is the effect of questions asked by the insurer?

Answer 23

The mere fact the insurer asks particular questions in a proposal form doesn’t in principle relieve the insured of their obligation at common law to disclose any other material fact. However, there is a question as to whether, if the insurer asks questions in a particular way they can be held to have waived the right to any further information (or if they ask a question which gives an ambiguous answer and they fail to pursue the true meaning of the answer, then they may be held to have waived the right to any further information)

So if the insurer has asked whether the insured has made any insurance claims in the last 5 years - in answering that, is the insured taken to think that the insurance company has waived disclosure of any claims that have been made earlier than 5 years ago?

Question 24

Hair v Prudential Assurance Co Ltd [1983]

Answer 24

“Whether or not such waiver is present depends on a true construction of the proposal form, the test being: would a reasonable man reading a proposal form be justified in thinking that the insurer had restricted his right to receive all material information and consented to the omission of the particular information in issue?”

Question 25

What is the effect of non-disclosure of material facts?

Answer 25

The effect of non-disclosure of material facts is that the innocent party can avoid the contract from its commencement - see Marine Insurance Act s. 17(1) and Joel v Law Union & Crown Insurance Co. [1908]. The contract is voidable rather than void[ This means that restitutio in integro must be possible - the normal rule in contract law in relation to voidable contracts.].
⁃ There is no right of damages. All sums paid out to the insured must be repaid to the insurer and the premiums returned/refunded by the insurer to the insured.

Question 26

What is the duty not to misrepresent?

Answer 26

There is a duty not to misrepresent material facts.

Question 27

When are representations elevated to material facts?

Answer 27

In practice, representations are often elevated by insurers to the status of material contractual terms by a ‘basis of the contract’ clause in the insurance policy. It can be reduced if one of the parties has been induced to enter into it as a result of an operative misrepresentation. The doctrine is not particularly important in an insurance context as the insurer is more likely to rely on the wider duty of disclosure.

Question 28

What does s 20 Marine Insurance Act 1906 provide for?

Answer 28

There is some assistance to the law of misrepresentations (and the consequences of breach) under s 20 Marine Insurance Act 1906:
⁃ (1) Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract.
⁃ (2) A representation is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.
⁃ (3) A representation may be either a representation as to a matter of fact or as to a matter of expectation or belief;
⁃ (4) A representation as to a matter of fact is true if it be substantially correct, that is to say, if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer;
⁃ (5) A representation as to a matter of expectation or belief is true if it be made in good faith[ So simply because the insured’s expectation or belief turns out to be wrong doesn’t of itself amount to misrepresentation - you only have to be substantially correct rather than actually correct as long as you are in good faith.].

Question 29

Economides v Commercial Union Assurance Co Plc [1988]

Answer 29

With regard to the standard expected of the insured where he makes a representation as to a matter of expectation or belief:

⁃ Insured was a cypriot student who lived in London and took out a household contents insurance policy. The total sum insured was £12k (index linked). The max amount recoverable for loss of valuables in relation to the contents was 1/3 of the £12k. The proposal form stated that it formed the basis of the contract (so the answers given formed the basis of the contract) and that the insured’s answers were given to the best of his knowledge. The insured’s parents moved in and the mother brought some jewellery - the insured then raised the sum insured to £16k. The flat is burgled and most of the jewellery is stolen - it turns out that the items stolen were worth £31k (far higher than £16k estimated by the insured) (out of a total contents value of the flat contents of £40k.)
- The insured was operating on the basis of information provided to him by his father, genuinely thought he was telling the truth.
- The insurer sought to avoid the policy on the grounds of misrepresentation and non disclosure of material facts. In relation to misrepresentation the Court held that the sole obligation of the insured in representing the value of the contents was a representation of expectation or belief and provided this was made honestly (which it was in this case) then it was made in good faith.
⁃ The court specifically held that the test that an insured has in relation to representing a position to the best of his expectation or belief is one of honesty. So as long as the representation is made honestly, it will not be a misrepresentation. The insurance company was not entitled to avoid liability.
- The insured cannot be expected to disclose matters of which he is unaware.
⁃ This approach in Economides was followed by the Privy Council in of Zeller v British Caymanian Insurance Co. Ltd. [2008].

Question 30

Why is it difficult to reconcile Economides with an earlier Scots case McPhee –v- Royal Insurance 1979 which seems to suggest a higher threshold than mere honesty?

Answer 30

⁃ The pursuer’s boat was destroyed by fire. The vessel had been insured on a valued basis of £12,300. The problem was that the dimensions of the vessel had been misdescribed in the proposal form (the insurers were under the impression that it was a bigger vessel than it actually was. Evidence was led that when the insured made the representation he was sitting in the insurance broker’s office so didn’t know the exact dimensions so he phoned up the previous owner who gave the wrong dimensions.
⁃ The representations by the insured were required to be true to the best of the insured’s knowledge and belief. There was also a basis of the contract clause in the policy. The court held that it was not enough for the insurer to show that the information was untrue or inaccurate; the insurance company also had to show that the statements were not true to the insured’s best knowledge and belief. The court held that the insured’s phone call to the previous owner was not evidence of sufficient diligence to constitute ‘best knowledge and belief’. Thus the insurer’s were permitted to avoid liability.[ And Lord Robertson commented that to give answers to the ‘best knowledge and belief’ the insured must have a reasonable basis for the knowledge and belief - phoning up the previous owner was not enough to satisfy this.]

Question 31

What is a consumer insurance contract?

Answer 31

A consumer insurance contract is an insurance contract entered into between an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade business or profession and a person who carried not he business of insurance and who becomes a party to the contract by way of that business ((s 1) 2012 Act).

Question 32

What does section 2(2) Consumer Insurance (Disclosure and Representations) Act 2012 provide for?

Answer 32

Where the consumer insured and insurer enter into a consumer insurance contract, the common law duties of (a) disclosure and (b) not to misrepresent material facts, and the equivalent statutory duties in the Marine Insurance Act 1906 are replaced by a single duty which obliges the consumer insured to take reasonable care[ So the consumer merely has to take reasonable care not to misrepresent the position so a consumer insurance contract is no longer a contract of utmost good faith.] not to make a misrepresentation before the contract is formed or varied

Question 33

What is the difference in consumer insurance contracts to commercial insurance contract?

Answer 33

Note the difference in consumer contracts regarding the insured’s knowledge of relevant circumstances - see Economides v Commercial Union Assurance Co Plc [1988] QB 587 (CA) and Joel v Law Union & Crown Insurance Co 1908 2KB 863 (cases referred to above) where Fletcher Moulton LJ stated “you cannot disclose what you do not know. The obligation to disclose, therefore, necessarily depends on the knowledge you possess”.
- So this duty replaces any duty relating to disclosure or representations to an insurer which existed in the same circumstances before the Act applied (s2(4)).

Question 34

What is the standard of care to be discharged by the consumer insured?

Answer 34

The standard of care to be discharged by the consumer insured is that of the reasonable consumer, unless (1) the insurer was, or ought to have been, aware of any particular characteristics or circumstances of the actual consumer or (2) the representation made by the consumer was dishonest[ Also taken as constituting a lack of reasonable care.]: section 3(3), (4) and (5).

Question 35

How is it determined whether the insured took reasonable care?

Answer 35

Whether the insured has taken reasonable care not to make a misrepresentation is to be determined in light of all the relevant circumstances and the Act sets out some examples of factors that may need to be considered: section 3(1) and (2)[ This includes the type of insurance contract in question and how clear and specific the insurer’s questions were.].

Question 36

When will the insurer have a remedy?

Answer 36

The insurer will have a remedy where the consumer insured breaches the duty to take reasonable care not to make a misrepresentation and where without the misrepresentation the insurer would not have entered into the contract or would have done so only on different terms: section 4.

[ So, there are requirements of:

1) breach of duty to take reasonable care not to make a misrepresentation
2) inducement (i.e. without the misrepresentation the insurer wouldn’t have entered into the contract / would have entered on different terms.]

Question 37

What must a misrepresentation by a consumer consist of?

Answer 37

It must be (i) deliberate or reckless or (ii) careless.
⁃ (i) It will be deliberate or reckless if the consumer knew that (a) it was untrue or misleading, or did not care whether or not it was untrue or misleading and (b) the matter to which the misrepresentation related was relevant to the insurer or the consumer did not care whether or not it was relevant to the insurer.
⁃ (ii) A misrepresentation is careless if it is not deliberate / reckless: section 5(2) and (3).

Question 38

Who does the burden of proving that the misrepresentation was deliberate or reckless lie with?

Answer 38

The insurer (section 5(4)).

Question 39

What is the rebuttable presumption where an insurer asks a clear and specific question to the consumer?

Answer 39

There is a rebuttable presumption that the consumer had the knowledge of a reasonable consumer and that the consumer knew that a matter about which the insurer asked a clear and specific question was relevant to the insurer: s 5(5).

Question 40

What do remedies for the insurer depend on?

Answer 40

Remedies for the insurer depend on the nature of the misrepresentation
⁃ 1) If the consumer breaches the duty by making a deliberate or reckless misrepresentation, the insurer has the remedy of avoiding the contract and refusing all claims. The insurer can retain all of the premiums paid, except to the extent (if any) that it would be unfair to the consumer to retain them: s 4 and Schedule 1, para. 2.
⁃ 2) If the consumer makes a careless misrepresentation the nature of the insurer’s remedy is dependent on whether the insurer would have entered into the contract on different terms: s 4 and Schedule 1, para. 4.
⁃ If the insurer would not have entered into the contract, then he may avoid the contract and refuse all claims but must return all of the premiums paid: Schedule 1, para. 5.
⁃ However, if the insurer would have entered into the contract, but on different terms (except terms regarding the premium), then the contract is treated as if it includes those different terms: Schedule 1 para 6. If the insurer would have levied a higher premium, the insurer may reduce proportionately the amount to be paid to the consumer on a claim: Schedule 1, paras. 7 and 8.

So the onus is now on the insurer to ask questions concerning all matters they consider to be material - it is now much more difficult for the insurer to avoid the contract.

Question 41

What happens in the context of life assurance [not in the lectures]?

Answer 41

In the context of life assurance, s. 8 of the 2012 Act provides particular assumptions where an
insurance policy is taken out over the life of another person (not being a party to the insurance
contract). In this scenario,

A) any information provided to the insurer by the non-contracting party is to be treated as if it were provided by the person who is the party to the contract, but
(B) in relation to such information, if anything turns of the state of mind, knowledge, circumstances or characteristics of the party providing the information, it is to be determined by reference to the non-contracting party, and not the party to the contract (s.8(2))

An insurer has a remedy against a consumer for a misrepresentation made by he consumer before the contract of insurance was entered into or varied only if:
(A) the consumer made the misrepresentation in breach of the duty set out in s2(2)
(B) the insurer shows that, without the misrepresentation, the insurer would not have entered into the contract at all, or would have done so on different terms (s4(1).

A misrepresentation in respect of which the insurer has a remedy is known as a “qualifying misrepresentation”. This is either:

(a) deliberate or reckless [I.e. Where the consumer knew it was untrue or misleading and did not care], or
(b) careless [the consumer knew the matter to which the misrepresentation was relevant and did not care whether or not it was relevant to the insurer] (s5(2)).

The insurer must show that a qualifying misrepresentation was deliberate or reckless (s5(4)).

It is presumed that (a) the consumer had the knowledge of a reasonable consumer and (b) the consumer knew that a matter about which the insurer asked a clear and specific question was relevant [s5(5)).

If it was reckless, the insurer (a) may avoid the contract and (b) need not return any of the premiums paid, except to the extent that it would be unfair on the consumer to retain them.

Question 42

Is the duty not to make a fraudulent claim the same for commercial and consumer insurance contracts?

Answer 42

The rules are the same for both commercial and consumer insurance contracts. A claim is fraudulent if the insured knows it to be false or is reckless as to its truth.

Question 43

Where an insured makes a fraudulent claim, is the insurer under any liability to meet that claim?

Answer 43

No

Question 44

Black King Shipping Corporation v Massie (The “Litsion Pride”) [1985]

Answer 44

Warzone insurance taken out in relation to ships. Part of the policy required the insured to inform the insurer before entering war zones or as soon as was practicable. Letters were sent with backdated dates to make it look like they had notified the insurer before they entered the war zone. During the course of the evidence the letters were discovered to be fraudulent and the insurer didn’t have to pay out.

Question 45

Can a person who made a fraudulent claim, make another claim in relation to the same incident?

Answer 45

No - the making of a fraudulent claim also rules out any valid claim that the insured might have had in relation to the same incident.

Question 46

Ewer v National Employers Mutual General Insurance Association (1937)

Answer 46

This case provides insight into the courts attitude to a bit of exaggeration in a claim made for the purpose of negotiating settlement of the claim:

Claimant claimed the current cost price of new items of furniture to replace the secondhand items he had lost in a house fire. While the judge held the claim was preposterous, he chose to consider it as an understandable opening gambit for the purpose of negotiations with the insurers (since the insurers would generally seek to reduce the amount that they would pay out.) So there may be a fine line between whether something is ‘inflated’ for this purpose of negotiation or whether it becomes part of a fraudulent claim.

Question 47

Ewer v National Employers Mutual General Insurance Association (1937)

Answer 47

This case provides insight into the courts attitude to a bit of exaggeration in a claim made for the purpose of negotiating settlement of the claim:

Claimant claimed the current cost price of new items of furniture to replace the secondhand items he had lost in a house fire. While the judge held the claim was preposterous, he chose to consider it as an understandable opening gambit for the purpose of negotiations with the insurers (since the insurers would generally seek to reduce the amount that they would pay out.) So there may be a fine line between whether something is ‘inflated’ for this purpose of negotiation or whether it becomes part of a fraudulent claim.

Question 48

Fargnoli v G A Bonus plc 1997

Answer 48

Governs the difficulty of when insured makes a fraudulent claim after making an earlier valid claim:

In Scotland it is clear that a subsequent fraudulent claim does not allow the insurer to avoid the contract (or to avoid the earlier claim that was honestly made[ So the earlier claim was still valid despite the later fraudulent claim.]).
So the insurers sole remedy is forfeiture of the fraudulent claim - the insurer is not entitled to avoid the contract.
- The insurance policy provided that where a fraudulent claim had been made by the insured, “all benefit” of the insurance policy was to be forfeited by the insured. The insurers argued that the insured’s fraud rendered the policy retrospectively void.
- Here the insurers sought to avoid liability for damage caused to a restaurant by fire on the basis that a second fire had been wilfully caused by the insured.
- Held: a material breach of contract permits the innocent party to rescind, but does not “absolve parties from primary obligations already due for performance at the time of rescission” [Lord Penrose at 22].
- The subsequent fraud by an insured would not, therefore, permit an insurer to avoid liability in relation to an earlier honest claim.

Question 49

What is the legal position on avoidance in England? Is it clear?

Answer 49

However, in English law, the legal position on avoidance in this context is presently unclear (see Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd and Others (The Star Sea) [2001] UKHL 1,