Academic journal article Defense Counsel Journal

The Duty of Utmost Good Faith in Insurance Law: Where Is It in the 21st Century? the Historical Background of Good and Bad Faith Continues to Develop in English Law, Especially in Two Recent Maritime Cases

Academic journal article Defense Counsel Journal

The Duty of Utmost Good Faith in Insurance Law: Where Is It in the 21st Century? the Historical Background of Good and Bad Faith Continues to Develop in English Law, Especially in Two Recent Maritime Cases

Article excerpt

THE duty of good faith in insurance law, first enunciated by Lord Mansfield in 1766 in Carter v. Boehm, predates the coming into existence of the United States. Yet, more than 200 years of English legal history have not solved all the problems that arise from the lack of good faith of insureds and sometimes of insurers and the ingenuity of their legal advisers. As recently as 1996, the House of Lords were split 3-2 over fundamental questions on the duty of disclosure.

Two important recent English decisions--The "Star Sea" (1) and The "Mercandian Continent," (2) which concern marine insurance but are of general application to all forms of insurance and reinsurance--address this issue: Does the duty of good faith continue after the making of the contract of insurance, and if so what are the consequences if it is breached?

A LOOK AT HISTORY

In Carter v. Boehm, Lord Mansfield said:

      Insurance is a contract of speculation. The special facts upon which the
   contingent chance is to be computed lie most commonly in the knowledge of
   the assured 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 circumstances
   do not exist. The keeping back of such circumstances is fraud, and
   therefore the policy is void.

      Although the suppression should happen through mistake, without any
   fraudulent intention, yet still the underwriter is deceived and the policy
   is void; because the risque run is really different from the risque
   understood and intended to be run at the time of agreement.... The policy
   would be equally void against the underwriter if he concealed. ... Good
   faith forbids either party, by concealing what he privately knows to draw
   the other into a bargain from his ignorance of the fact, and his believing
   the contrary. (3)

Carter v. Boehm concerned the pre-contractual duty of disclosure. Lord Mansfield did not consider the duties of the parties to one another after the contract had been made. Most of the 19th century cases concern breaches of the duty of good faith by reason of non-disclosure or misrepresentation at the time of the making of the contract. It was understood to be the law, however, that there was no obligation on an assured to disclose to the underwriter facts material to the risk that came to the assured's knowledge after the contract was made. (4)

MARINE INSURANCE ACT 1906

The Marine Insurance Act 1906 (MIA), as its name suggests, is generally confined to marine insurance. However, the House of Lords has held that Sections 17 to 20 of the MIA codify the common law and apply to all forms of insurance and reinsurance. (5) Section 17 of the MIA provides:

      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 avoided by the other party.

Sections 18-20 of the MIA address the pre-contractual duty of good faith at more length. Section 18 deals with disclosure by the assured, Section 19 with disclosure by agents to insure, and Section 20 deals with misrepresentation.

CONTINUING DUTY?

Does the duty of utmost good faith continue after the contract is made? Sections 18 and 20 of the MIA both refer to the situation "continuing before the contract is concluded." Section 17 contains no such limiting language.

A. The "Litsion Pride"

In Black King Shipping Corp. v. Massie (The "Litsion Pride"), Hirst J. said that "the duty of utmost good faith applied with its full rigour" in relation to the giving of information by the assured to the underwriter about the voyage of a vessel under a policy that required the giving of such information. (6)

In this case, the assured ship owners failed to disclose to the underwriters that the vessel was about to enter a dangerous part of the Persian Gulf so as to avoid having to pay a higher war risks premium. …

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