REFORMING INSURANCE LAW: - Law Commission

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invaluable in that it was devised after lengthy consultation with all interest groups and provides concrete evidence on the strengths and weaknesses of the Australian system. 3 THE NATURE OF THE DUTY OF UTMOST GOOD FAITH The duty of utmost good faith in English law 25 3.1 The relevant principles, which are codified in ss 18 to 20 of the Marine Insurance Act 1906 may be stated briefly. The criticisms of the existing law are fully stated in the <strong>Law</strong> <strong>Commission</strong>s’ first Issues Paper and are not repeated here. 3.2 First, the assured is under a pre-contractual duty to disclose material facts to the insurers and is also under a pre-contractual duty not to make material misstatements. A fact is material if it would influence the judgment of a prudent underwriter in deciding whether to insure and, if so, on what terms and at what premium, 26 although it remains necessary for the insurers to prove that they have been induced by the assured’s presentation of the risk. The English courts have recognised that these rules may operate unfairly in the modern context, and have narrowed the definition of materiality 27 while at the same time expanding the concept of inducement. 28 Any breach of the duty renders the policy voidable ab initio. 3.3 Secondly, the insurers are under a corresponding pre-contractual duty of utmost good faith to disclose or not to misrepresent material facts to the assured. 29 There is no decided case in which the insurers have been held to be in breach of this obligation, and there is a debate as to the scope of materiality, although it has been said by the Court of Appeal that “the duty falling upon the insurer must at least extend to disclosing all facts known to him which are material either to the nature of the risk sought to be covered or the recoverability of a claim under the policy which a prudent insured would take into account in deciding whether or not to place the risk for which he seeks cover with that insurer.” 30 However, given that the remedy of the assured is avoidance ab initio, the point is really only of significance if the assured wishes to resile from a policy before there has been any loss under it. 25 And also in Australian marine insurance and reinsurance law. 26 Marine Insurance Act 1906, ss 18(2) and 20(2). 27 By confining the definition to facts which relate to the risk, as opposed to other considerations which may have influenced the insurers (eg, the creditworthiness of the assured): North Star Shipping Ltd v Sphere Drake Insurance plc [2006] Lloyd’s Rep IR 519. For a further narrowing, see Norwich Union Insurance v Meisels [2006] EWHC 2811 (QB). 28 By requiring the insurers to show that would have acted differently had the true facts been stated accurately: Drake Insurance Co v Provident Insurance Co [2004] Lloyd’s Rep IR 277. 29 Marine Insurance Act 1906, s 17 30 La Banque Financière de la Cite SA v Westgate Insurance Co. Ltd [1989] 2 All ER 952, 990. No comment was made on appeal to the House of Lords, [1990] 2 All ER 947. See also Aldrich v Norwich Union Life, Norwich Union Life v Qureshi [2000] Lloyd’s Rep IR 1. 10
3.4 Thirdly, the assured is under a continuing duty of utmost good faith, to disclose material facts during the currency of the policy and to avoid making misrepresentations. 31 However, as a result of a series of Court of Appeal decisions 32 it has become clear that the continuing duty of utmost good faith does not extend to fraudulent claims and that the duty of disclosure applies only where there is an express disclosure obligation under the policy which the assured has broken in a fashion which amounts to a repudiation of the entire policy assuming that the assured acted other than with the utmost good faith and that the insurers were induced to act in a different fashion: in such a case, the insurers have the alternative rights to treat the policy as repudiated or to avoid the policy ab initio. However, as there is no case in which it has been held that breach of a notification obligation is a repudiation of the policy as a whole, 33 the assured’s continuing duty is to all intents and purposes non-existent. The only manner in which an independent duty of disclosure can affect an assured is where the courts regard it as appropriate to imply a term in the policy requiring disclosure of a particular matter: such a duty was imposed with respect to disclosure of placing and claims material in the hands of the assured’s brokers which had already been seen by the insurers. 34 A false statement by the assured in the course of the policy and which induces the insurers to act in a particular fashion may be actionable misrepresentation, but this is nothing to do with utmost good faith. 3.5 Fourthly, the insurers are under a continuing duty of good faith. The duty is one manufactured by the English courts in the past decade, and from unpromising material. As a matter of principle, and given that avoidance ab initio is the only remedy recognised by the law for breach of the duty of utmost good faith, it is difficult to think of any situations in which the continuing duty could be of much use to the assured. However, the courts have held that there are various continuing duties on insurers. Those duties were initially expressed as emanating from the continuing duty of utmost good faith 35 or by way of implied term, 36 or both, 37 although ultimately they have been rationalised as implied terms whose content is coloured by the fact that a contract of insurance is one of utmost good faith. 38 The insurers’ continuing duty of utmost good faith to date has been applied to: the obligation of a liability insurer to negotiate with the third party claimant against the assured in good faith and to avoid conflicts of interest; 39 the obligation of reinsurers (and, by extension, liability insurers) not to take into account irrelevant considerations (ie, to act rationally, the standard for judicial review, as opposed to acting reasonably, which would be an objective standard which the courts would not be able to police) 31 Black King Shipping v Massie, The Litsion Pride [1985] 2 Lloyd’s Rep 437, overruled on its precise facts by The Star Sea [2001] Lloyd’s Rep IR 227. 32 K/S Merc-Skandia XXXXII v Certain Lloyd's Underwriters [2001] Lloyd's Rep IR 802; Agapitos v Agnew [2002] Lloyd’s Rep IR 573. 33 The doctrine of partial repudiation was rejected by the Court of Appeal in Friends Provident Life and Pensions Ltd v Sirius International Insurance Corp [2006] Lloyd’s Rep IR 45. 34 Dedicated Ltd v Tyser & Co Ltd [2006] EWCA Civ 54. 35 Insurance Corporation of the Channel Islands v McHugh (No.1) [1997] LRLR 94. 36 Gan v Tai Ping (Nos 2 and 3) [2001] Lloyd’s Rep IR 667; Bonner v Cox Dedicated Corporate Member Ltd [2006] Lloyd’s Rep IR 385. 37 Eagle Star v Cresswell [2004] Lloyd’s Rep IR 437. 38 Goshawk Dedicated Ltd v Tyser & Co Ltd [2006] EWCA Civ 54. 39 Groom v Crocker [1939] 1 KB 194; K/S Merc-Skandia XXXXII v Certain Lloyd Underwriters [2001] Lloyd’s Rep IR 802. 11
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Page 4 and 5: 6 FRAUDULENT CLAIMS 6.1 Meaning of
Page 6 and 7: legislation as it relates to substa
Page 8 and 9: different fate. On 9 September 1976
Page 12 and 13: in deciding whether or not to appro
Page 14 and 15: 3.8 As regards misrepresentation, t
Page 16 and 17: with the duty of disclosure unless
Page 18 and 19: confirmed by s 28 which requires th
Page 20 and 21: easonable proposer for a marine pol
Page 22 and 23: in the revised version of s 22 set
Page 24 and 25: 4.23 The section is hardly a model
Page 26 and 27: elevant to the decision of the insu
Page 28 and 29: treated as misrepresentation if it
Page 30 and 31: therefore, an assured who uses a br
Page 32 and 33: the matter could be resolved by an
Page 34 and 35: here, in that there can be non-disc
Page 36 and 37: Cases other than fraud: damages 4.5
Page 38 and 39: elevant facts or the assured’s mi
Page 40 and 41: and investment policies with surren
Page 42 and 43: developed has raised exactly the sa
Page 44 and 45: Co-assureds 4.68 English law draws
Page 46 and 47: Temporary cover 206 4.72 English la
Page 48 and 49: utmost good faith. 218 The remedy i
Page 50 and 51: purpose, 232 proof of honesty is no
Page 52 and 53: of the insurers under the policy, u
Page 54 and 55: 5.14 A second obvious possibility i
Page 56 and 57: has been held - perhaps inconsisten
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56(2), 298 and that what is require
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Warranties of fact 7.3 Warranties o
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person not to do the act or to avoi
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the risk and is purely administrati
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7.14 The position in Australia has
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personal injury claim failure by th
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7.20 Treasury Review I, 2003, found
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Continuing obligations in marine in
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contributed to by the illegality an
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waters, 391 that the classification
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changing market, and the Court of A
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unresolved issues as to whether the
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8.14 Although the point is not fina
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which the need for each of the part
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Review II, 2004, as an appropriate
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8.21 Finally, s 68 seeks to protect
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also include an address and telepho
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Standard cover 8.28 Standard cover
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period. In addition, such policies
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(the existing s 40(1)); or (b) the
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disputes as to whether the correct
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interests to do so. However, insure
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Matters in the 1984 Act already a p
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REFORMING INSURANCE LAW: - Law Commission

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