UTMOST GOOD FAITH
CILA CH 1 Introduction to the Insurance Industry 36
Utmost Good Faith 6. UTMOST GOOD FAITH Contents 6.1 The Principle 6.2 The Legal Position Case Law 6.3 How Utmost Good Faith is Applied in Practice 6.4 Breach of Utmost Good Faith 6.5 Key Points to Remember Introduction Utmost good faith is a key principle of insurance. It is concerned with the information that is disclosed by the parties who are involved in the insurance contract. If a party fails to adhere to the principle of utmost good faith, the outcome of the claim may be affected. This section explains what is meant by utmost good faith, how it is applied in practice and what happens when it is breached. 6.1 The Principle Contracts, in general, are subject to the doctrine of caveat emptor (let the buyer beware). This means that each party must ask questions to ensure that they have all the information they need before signing the contract. Statutes such as the Sale of Goods Act 1979 and the Unfair Contract Terms Act 1977 affect what must be supplied. Also, there must be no misrepresentation or fraud. Insurance contracts are not based on the principle of caveat emptor. Those involved in negotiations for an insurance contract must disclose all relevant information to all the other parties in the negotiation. This is particularly important because relevant information will typically only be known to one party to the contract, that is, the proposer or Policyholder. This is the principle of uberrima fides or utmost good faith. Think about the type of information that might be relevant to an insurance company when deciding whether to accept a risk or calculating the premium to charge. Consider a home buildings policy which provides cover against Fire, Theft and Flood. What features of the building would be relevant to the insurance company and why? 6.2 The Legal Position Case Law The principles of what must be disclosed were established in the case of Carter v Boehm (1766): The proposer must disclose all material facts Material facts are those that would influence an underwriter as to whether he should or should not accept the risk 37
CILA CH 1 Introduction to the Insurance Industry The proposer does not need to disclose what the underwriter ought to know The proposer is not required to disclose things he could not know. These have been codified in the Marine Insurance Act 1906: Clause 17 - A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith being not observed by either party, the contract may be avoided by the other party. Clause 18(1) - Subject to the provisions of this section, 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 which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract. Clause 18(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. Clause 18(3) - In the absence of inquiry the following circumstances need not be disclosed, namely: (a) Any circumstance which diminishes the risk; (b) Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know; (c) Any circumstance as to which information is waived by the insurer; (d) Any circumstance which it is superfluous to disclose by reason of any express or implied warranty. Clause 18(4) - Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact. Clause 18(5) - The term circumstance includes any communication made to, or information received, by the assured. 6.3 How Utmost Good Faith is Applied in Practice Examples of facts which need NOT be disclosed by the Insured or Insurer: Facts of law Facts which the Insurer should know (eg common knowledge, current affairs) Facts which lessen the risk (security fittings, sprinklers, alarms) Facts which the Insurer should have noticed from other information given (eg if the proposer has referred to other records) Facts related to the Insurers survey Facts covered by policy conditions Facts which the proposer could not reasonably be expected to know Convictions which have been spent under the Rehabilitation of Offenders Act 1974. Facts which must be disclosed: Facts which make a risk greater than usual Facts which would increase the possibility of a loss 38
Utmost Good Faith Previous claims or losses Facts which reduce an Insurers subrogation rights The existence of other Policies Facts relating to and descriptions of the subject matter of the insurance. Taking note of the above, consider a restaurant policy which provides cover for contents, fixtures and fittings, and stock. Which of the following facts must the restaurateur disclose to his Insurers: 1. The neighbouring properties are a hardware shop and a Post Office 2. The restaurant suffered a fire 2 years ago 3. A sprinkler system was installed after the fire 4. The value of the wines and spirits held on the premises 5. Agency waiting staff are used on a regular basis. UK Legal Cases continue to confirm the Principles In Lambert v Cooperative Insurance Society (1975), it was confirmed that the prudent insurer test in Section 18 of the Marine Insurance Act 1906 not only applies in connection with non-marine matters, but is still the relevant test. Utmost Good Faith at the Claims Stage There is a limited duty of utmost good faith at the claims stage. It is effectively confined to a duty not to make a fraudulent claim, see Orakpo v Barclays Insurance Services Co Ltd (1996) and Galloway v Guardian Royal Exchange (1997). Impact of Proposal Forms If information is waived, for example by insurers asking only certain questions in their proposal form, there may be no duty on the proposer to volunteer additional information (unless there is a general question asking if there is anything else that should be disclosed). Obtain an insurance proposal form and review the questions asked by Insurers. Look for any additional statements that ask the proposer to provide any further information that is material or relevant. Utmost Good Faith applies to Insurers Other case law, notably Banque Financiere de la Cite SA v Westgate Insurance Company Ltd (1988) confirmed that the duty of disclosure is mutual. Both proposer (or policyholder if there is a change in risk during the currency of the policy or at renewal) and insurer must disclose all material facts. 6.4 Breach of Utmost Good Faith The remedy for non-disclosure of a material fact is that the Policy is voidable (in other words it can be affirmed or rescinded) at the option of the aggrieved party. 39
CILA CH 1 Introduction to the Insurance Industry As the non-disclosure is usually on the part of the proposer/policyholder, the initiative is with the Insurer. If the Policy is avoided, the Policy is treated as if it had never come into effect and any claims paid should be refunded to the Insurer and the premium returned to the Policyholder. The following cases give useful examples of non-disclosure: Carter v Boehm (1766) Farnham v Royal Insurance Co Ltd (1976) Kausar v Eagle Star Insurance Co Ltd (1997) James v CGU Insurance PLC (2001) Lambert v Co-operative Insurance Society Ltd (1975) Locker & Woolf Ltd v Western Australian Insurance Co Ltd (1936) Mitchell v Scottish Eagle Insurance Co (1996) Simner v New India Assurance Co Ltd (1994) Woolcott v Sun Alliance & London Insurance Ltd (1978). The strict legal position in the UK is amended by the ABI Statement of General Insurance Practice, in relation to persons insuring in their private capacity. Under this agreement, members of the ABI will not repudiate liability to indemnify a Policyholder on grounds of non-disclosure of a material fact which a policyholder could not reasonably be expected to have disclosed, or on grounds of misrepresentation unless it is a deliberate or negligent misrepresentation of a material fact. The Rehabilitation of Offenders Act 1974 is also relevant. The Act provides that, when the rehabilitation period has expired, certain convictions need not be disclosed. The rehabilitated person can then truthfully answer no to any question relating to his criminal history or, if no specific question is asked, he has no need to volunteer his criminal record. Consider the handling of a claim and how the process may reveal facts that were not disclosed at proposal stage. In particular, think about the type of information you obtain from a Policyholder either on the telephone, via correspondence or during a visit to their property. How would you check whether this information had previously been disclosed? Ask your colleagues for examples of non-disclosed material facts. Find out how they dealt with the issue and whether it had an impact on the claim. 6.5 Key Points to Remember If you suspect non-disclosure or misrepresentation, you will need to: Check the proposal (including any correspondence generated at the proposal stage) and any documentation generated at renewal or on any change to the policy Verify the answers given on the proposal or at renewal Check to see whether the ABIs Statement of General Insurance Practice applies Check to see whether the Insurance Ombudsmans Guidelines assist. 40