REFORMING INSURANCE LAW: - Law Commission

The subscription market
4.74 The practice at Lloyd’s and in the London subscription market is for the slip to be
scratched successively by different underwriters. In principle each of them is required to assess
the risk for himself, but in practice it is common for the judgment of the leading underwriter to
be taken into account by the following market. A legal problem arises where a false statement is
made to the leading underwriter but not repeated to the following market: if the leader is
induced, the following market may argue that although nothing has been said to them they are
entitled to rely on the presentation to the leader. This argument has little to commend it,
particularly since the adoption of the actual inducement test in Pan Atlantic, and it was rejected
by the Court of Appeal in General Accident v Tanter, The Zephyr 213 where it was held that a
false statement made to the leader could not be relied on by the following market to deny
liability. However, in a series of later first instance decisions 214 the courts have reached the
contrary view, the reasoning being variously that it was understood by the market that the
followers would rely on the leader or that if a false statement is made to the leader there is an
obligation to disclose it to the followers. 215
4.75 This point was unsurprisingly not considered by the ALRC in is 1982 Report on general
insurance, but was discussed by the ALRC in its 2001 Report on marine insurance, the latter
concluding that “following underwriters should be deemed to have been induced to enter into the
contract if all the leading underwriters were induced. For this purpose, leading underwriters
should be defined to be those underwriters whose earlier acceptance of part of the risk induced
the following underwater to do so as well.” 216 There are no reasons given for this conclusion,
and it may be that the issue should be fully reviewed in any proposals for reform.
5 THE CONTINUING DUTY OF UTMOST GOOD FAITH
The implied term
5.1 The Insurance Contracts Act 1984 effectively abolishes the continuing duty of utmost good
faith 217 and replaces it with an implied term in s 13 whereby the parties are required to act
towards each other, in respect of any matter arising under or in relation to the policy, with the
213 [1985] 2 Lloyd’s Rep 529.
214 The two root cases are Aneco Reinsurance Underwriting Ltd v Johnson & Higgins [1998] 1 Lloyd's Rep. 565 and
International Lottery Management Ltd v Dumas [2002] Lloyd's Rep IR 237.
215 An argument which can be right only if the broker making the false statement was aware that he had done so,
given that a broker is not required to disclose what he does not know.
216 ALRC 91, para 10.130.
217 Re Zurich Australia Insurance Ltd (1999) 10 ANZ Ins Cas 61-429. There remains some doubt as to this
proposition, and it is arguable that ALRC 20 had intended to preserve and extend the duty of utmost good faith. The
point is probably insignificant given the development of the law since the passing of the Act.
47