REFORMING INSURANCE LAW: - Law Commission

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.
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