REFORMING INSURANCE LAW: - Law Commission

More documents

Recommendations

Info

in deciding whether or not to approve a settlement reached by the reinsured 40 and whether or not to exercise a claims control clause; 41 and the obligation of insurers not to avoid a policy for the assured’s failure to disclose material facts when they are aware 42 at the time of avoidance that the facts in question were untrue 43 or where the insurers had failed to ask the right questions on placement. 44 In the same way it has been suggested that if a policy term confers a discretion on insurers to waive strict compliance any request made by the assured to the insurers must be given due consideration and resolved in good faith. 45 It will be seen that English law is embryonic, in that the obligations to which the insurers’ continuing duty of utmost good faith are applicable have yet to be fully articulated, in that it is unclear whether damages are awardable and in that the test to date is based on rationality rather than reasonableness. The Australian concept of utmost good faith 46 3.6 The Insurance Contracts Act 1984 retains the concept of utmost good faith. Indeed, it is stated by s 12 to be a paramount requirement to which the remainder of the 1984 Act and other laws are subject. However, the legislation fundamentally alters the nature of good faith. The following paragraphs explain the structure of the legislation. Its detailed operation is considered thereafter. 3.7 The starting point is the separation of non-disclosure and misrepresentation on the one hand, and utmost good faith on the other. The duty of utmost good faith is expressed by s 13 of the 1984 Act in the following terms: A contract of insurance is based on the utmost good faith and there is implied in such a contract a provision requiring each party to it 47 to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith. 40 Gan v Tai Ping (Nos 2 and 3) [2001] Lloyd’s Rep IR 667. 41 Eagle Star Insurance Co Ltd v Cresswell [2004] Lloyd’s Rep IR 437. 42 Or, in the formulation of Pill LJ, ought reasonably to have been aware. 43 Drake Insurance Co v Provident Insurance Co [2004] Lloyd’s Rep IR 277, confirming the decision of Colman J in Strive Shipping Corporation v Hellenic Mutual War Risks Association [2002] Lloyd’s Rep IR 669 and rejecting by implication the contrary view of the Court of Appeal in Brotherton v Aseguradora Colseguros SA (No.2) [2003] Lloyd’s Rep IR 758, a case which is now to be treated only as authority for the proposition that the court cannot overturn an avoidance: an application by the insurers to the court for avoidance is, however, subject to the Drake principle. It may also be the case that if the avoidance is found to have been in bad faith, damages might be awardable for breach of an implied term. 44 WISE Underwriting Agency Ltd v Grupo Nacional Provincial SA [2004] Lloyd’s Rep IR 764, thereby classifying pre-contract waiver as a post-contractual aspect of utmost good faith. 45 Diab v Regent Insurance Co Ltd [2006] Lloyd’s Rep IR 779; Anders & Kern Ltd v CGU Insurance plc [2007] EWHC 377 (Comm). 46 Sutton, paras 3.8 to 3.14. 47 The wording appears to preclude a duty of good faith owed by insurers to a third party who is not a contracting party but who may have rights under the policy: cf Sutton, para 3.19. However, insurers were held to owe a duty of good faith to a third party in a series of cases: Wyllie v National Mutual Life Association of Australasia Limited (1997) 217 ALR 324; Hannover Life Re of Australasia Limited v Sayseng [2005] NSWCA 214; Dumitrov v S C Johnson & Son Superannuation Pty Ltd [2006] NSWSC 1372. If English law was to adopt something along the lines 12
Utmost good faith is, therefore, an implied term which applies to both parties to the contract. Accordingly it regulates their dealings with each other during the currency of the policy, although the phrase “in relation to” suggests that it may also apply pre-contractually. Moreover, under s 14 of the Act, reliance on any policy term other than in accordance with the requirement of utmost good faith is not permitted. It follows that breach of the duty of good faith is a breach of contract which either gives rise to damages or to an estoppel, and does not give rise to avoidance ab initio. The duty of utmost good faith, although bilateral, plainly has a greater effect on the insurers than on the assured, in two respects. First, it is inherent in the notion in s 14 of reliance on policy terms that such reliance will normally be by the insurers rather than by the assured. Secondly, the insurers’ duty is more onerous than that of the assured in that under s 12 the assured is not required to make any disclosure to the insurers unless it falls within the assured’s entirely distinct pre-contractual obligation of disclosure. This wording is not straightforward, in that it assumes that the duty of disclosure is capable of falling within ss 12 and 13 even though the duty of disclosure is pre-contractual whereas the duty of utmost good faith is a contractual term. The relationship between utmost good faith and the duty of disclosure has indeed given rise to some difficulty under the 1984 Act. Accordingly, if the UK is to adopt legislation along these lines, clearer drafting would be required. The point of the Australian drafting is to remove the argument that a post-contractual failure to disclose by the assured (eg, a variation in the risk) amounts to a breach of the duty of utmost good faith by him thereby putting him in breach of contract. The wording means that, unless the insurer specifically requires postcontractual disclosure by the assured they cannot rely upon s 13 to imply a term to that effect for their benefit. It would obviously be necessary to preserve this intention in any UK implementation. 3.7 Having laid down the concept that the parties must act with the utmost good faith in their dealings with each other under the policy, the 1984 Act goes on to regulate the pre-contractual obligations of the parties. As regards disclosure, the assured’s duty of disclosure is retained by s 21, but is subject to three significant restrictions: the test of materiality is no longer based on the prudent underwriter but rather focuses on the prudent assured; under s 21A the duty of disclosure is waived in respect of most forms of domestic policy unless the insurers have asked specific questions; and under s 22 the insurers are under a duty to inform the assured of the duty of disclosure, failing which they cannot rely on it unless the assured has been fraudulent. Section 21A was added in 1999, and has diminished the need for s 22 which was until the enactment of s 21A the major form of protection for the assured. As will be seen, there is a potential overlap between the duty of disclosure in s 21 and the obligation of the assured to act with the utmost good faith under s 13. Insurers are granted remedies for non-disclosure under s 28, but only if the non-disclosure made a difference to the insurers, and then only to the extent of that difference: for example, if the insurers would have charged a higher premium if they had known the undisclosed fact then the assured’s claim will be reduced by the amount of extra premium that would have been charged. If the non-disclosure was fraudulent, the insurers may avoid the contract. of s 13, it would be necessary to clarify this point so as to produce consistency with the principle in the Contracts (Rights of Third Parties) Act 1999 that a third party beneficiary has the same rights and liabilities as the contracting party himself. 13
Page 1: REFORMING INSURANCE LAW: IS THERE A
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 10 and 11: invaluable in that it was devised a
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
Page 58 and 59: is unduly harsh. Whatever the effec
Page 60 and 61: 56(2), 298 and that what is require
Page 62 and 63:
Warranties of fact 7.3 Warranties o
Page 64 and 65:
person not to do the act or to avoi
Page 66 and 67:
the risk and is purely administrati
Page 68 and 69:
7.14 The position in Australia has
Page 70 and 71:
personal injury claim failure by th
Page 72 and 73:
7.20 Treasury Review I, 2003, found
Page 74 and 75:
Continuing obligations in marine in
Page 76 and 77:
contributed to by the illegality an
Page 78 and 79:
waters, 391 that the classification
Page 80 and 81:
changing market, and the Court of A
Page 82 and 83:
unresolved issues as to whether the
Page 84 and 85:
8.14 Although the point is not fina
Page 86 and 87:
which the need for each of the part
Page 88 and 89:
Review II, 2004, as an appropriate
Page 90 and 91:
8.21 Finally, s 68 seeks to protect
Page 92 and 93:
also include an address and telepho
Page 94 and 95:
Standard cover 8.28 Standard cover
Page 96 and 97:
period. In addition, such policies
Page 98 and 99:
(the existing s 40(1)); or (b) the
Page 100 and 101:
disputes as to whether the correct
Page 102 and 103:
interests to do so. However, insure
Page 104 and 105:
Matters in the 1984 Act already a p
show all

REFORMING INSURANCE LAW: - Law Commission

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?