JurisdictionUnited States


The History of Insurance

A. The Context of Insurance

The essence of insurance is the spreading of risk from one person to many. To properly do so, it is necessary that all parties involved in the contract of insurance treat each other equally with good faith and fair dealing.

Modern insurance law holds that each policy of insurance incorporates an implied covenant or agreement that both the insured and the insurer will deal with each other in utmost good faith. The covenant of good faith and fair dealing is presumed and is usually not a written part of the policy.

1. The Historical Basis for the Covenant of Good Faith and Fair Dealing

As you read the case below, consider the manner in which each party treated the other. The author of the decision, Lord Mansfield of the British House of Lords, was the first to recognize in a court decision the implied covenant of good faith and fair dealing. Some of the language—old English—may be difficult to read but it will provide the reader with the basis for the fact that every contract of insurance has an implied covenant (contract agreement) of good faith and fair dealing.

As you read the decision, try to answer the following questions:

Ÿ Did the insurer treat the insured fairly?

Ÿ Did the insured fairly report facts to the insurer so it could properly evaluate the risk it was asked to take?

Ÿ Were both parties treated by each other fairly so that both were in a position to enjoy the benefits of the contract?

Ÿ Was the insurer compelled to take a risk it did not know it was taking?

Ÿ Was the insurer prudent in relying solely on the representations of the insured?

Regardless of its age, the case below established, as a matter of law and precedent, that an insurance contract is a contract of utmost good faith.

Carter v. Boehm
S.C. 1 Bl. 593, 3 Burr 1906, 11th May 1766

This was an insurance cause, upon a policy underwritten by Mr. Charles Boehm, of interest, or no interest: without benefit of salvage. The insurance was made by the plaintiff, for the benefit of his brother, Governor George Carter.

It was tried before Lord Mansfield at Guildhall and a verdict was found for the plaintiff by a special jury of merchants.

On Saturday the 19th of April last, Mr. Recorder (Eyre,) on behalf of the defendant, moved for a new trial. His objection was, “that circumstances were not sufficiently disclosed.”

. . .

Lord Mansfield reported the evidence—That it was an action on a policy of insurance for one year: viz. from 18th of October 1759 to 18th October 1760, for the benefit of the Governor of Fort Marlborough, George Carter, against the loss of Fort Marlborough in the island of Sumatra in the East Indies, by its being taken by a foreign enemy.

The event happened: the fort was taken, by Count D’Estaigne, within the year. The first witness was Cawthorne, the policy broker, who produced the memorandum given by the governor’s brother (the plaintiff) to him: and the use made of these instructions was to shew that the insurance was made “for the benefit of Governor Carter, and to insure him against the taking of the fort by a foreign enemy.”

Both sides has been long in Chancery: and the Chancery-evidence on both sides was read at the trial.

It was objected, on behalf of the defendant, to be a fraud, by concealment of circumstances which ought to have been disclosed: and particularly, the weakness of the fort, and the probability of its being attacked by the French: which concealment was offered to be proved by two letters. The first was a letter from the governor to his brother, Roger Carter, his trustee, the plaintiff in this cause: the second was from the governor to the East India-Company.

The evidence in reply to this objection consisted of three depositions in Chancery, setting forth that the governor had 20,000 £, in effects: and only insured 10,000 £ and that he was guilty of no fault in defending the fort.

The first of these depositions was Captain Tryou’s: which proved that this was not a fort proper or designed to resist European enemies: but only calculated for defense against the natives of the island of Sumatra: and also that the governor’s office is not military, but only mercantile: and that Fort Marlborough is only a subordinate factory to Fort St. George.

There was no evidence to the contrary. And a verdict was found for the plaintiff by a special jury.

After his Lordship had made his report,—The counsel for the plaintiff proceeded to shew cause against a new trial.

They argued that there was no such concealment of circumstances (as the weakness of the fort, or the probability of the attack,) as would amount to a fraud sufficient to vitiate this contract: all which circumstances were universally known to every merchant upon the exchange of London. And all these circumstances, they said, were fully considered by a special jury of merchants, who are the proper judge of them.

And Mr. Dunning laid it down as a rule—“that the insured is only obliged to discover facts; not the ideas or speculations which he may entertain, upon such facts.”

They said, this insurance, was in reality, no more than a wager; “whether the French would think it their interest to attack this for: and if they should, whether they would be able to get a ship of war up the river, or not.”

Sir Fletcher Norton and Mr. Recorder (Eyre) argued, contra, for the defendant (the underwriter).

They insisted, that the insurer has a right to know as much as the insured himself knows.

They alleged too, that the broker is the sole agent of the insured. These are general, universal principles, in all insurances. Then they proceeded to argue in support of the present object. The broker had, they said, on being cross-examined, owned that he did not believe that the insurer would have meddled with the insurance, if he had seen these two letters.

All the circumstances out to be disclosed.

This wage is not only “whether the fort shall be attacked:” but “whether it shall be attacked and taken.

Whatever really increases the risk ought to be disclosed. Then they entered into the particulars which had been here kept concealed. And they insisted strongly, that the plaintiff ought to have discovered the weakness and absolute indefensibility of the fort. In this case, as against the insurer, he was obliged to make such discovery, though he acted for the governor. Indeed, a governor ought not, in point of policy, to be permitted to insure at all: but if he is permitted to insure, or will insure, he ought to disclose all facts.

It cannot be supposed that the insurer would have insured so low as 41. per cent if he had known of these letters.

It is begging the question to say, “that a fort is not intended for defence against an enemy.” The supposition is absurd and ridiculous. It must be presumed that it was intended for that purpose: and the presumption was “that the fort, the powder, the guns &c. were in good and proper condition.” If they were not, (and it is agreed that in fact they were not, and that the governor knew it,) it ought to have been disclosed. But if he had disclosed this, he could not have got the insurance. Therefore this was a fraudulent concealment: and the underwriter is not liable.

It does not follow, that because he did not insure his whole property: therefore it is good for what he has judged proper to insure. He might have his reasons for insuring only a part and not the whole.

. . .

Lord Mansfield now delivered the resolution of the Court.

This is a motion for a new trial. In support of it, the counsel for the defendant contend, “that some circumstances in the knowledge of Governor Carter, not having been mentioned at the time the policy was underwrite, amount to a concealment, which ought, in law, to avoid the policy.”

The counsel for the plaintiff insist, “that the not mentioning these particulars does not amount to a concealment which ought, in law, to avoid the policy: either as a fraud: or, as varying the contract.”

· 1st: It may be proper to say something, in general of concealments which avoid a policy.

· 2dly: To state particularly the case now under consideration.

· 3dly: To examine whether the verdict, which finds this policy good although the particulars objected were no mentioned, is well founded.

First. Insurance is a contract upon speculation.

The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured 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 circumstance does not exist, and to induce him to estimate the risk, as if it did not exist.

The keeping back such circumstance is a 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 risk run is really different from the risk understood and intended to be run, at the time of the agreement.

The policy would equally be void against the underwriter, if he concealed: as, if he insured a ship on her voyage, which he privately knew to be arrived: and an action would lie to recover the premium.

The governing principle is applicable to all contracts and dealings.

Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary.

But either party may be innocently silent, as to grounds open to both, to exercise their judgment upon. . .

This definition of concealment, restrained to the efficient motives and precise subject of any contract, will generally hold to make it void, in favour of the party misled by his ignorance of the thing concealed.

There are many matters, as to which the insured may be innocently silent—he need not mention what the underwriter knows . . . An underwriter cannot...

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