Drake v. Provident's effect on insurers' duty of good faith in English law: are insurer bad faith cases going to hit England?

• Author: Perry, William J.

DRAKE V. PROVIDENT involved an insured who made a claim under his insurance policy with Provident Insurance after his wife, who was named as an additional driver, was involved in a collision with a motorcyclist. The insured's wife was also insured under her own policy issued by Drake.

Provident declined the insured's claim and sought to avoid the policy because the insured had not disclosed a speeding conviction when he renewed the policy. His wife therefore made a claim under her own policy. Drake then issued proceedings seeking to recover a contribution from Provident on the grounds that it had no right to avoid the policy.

Provident operated a points system for calculating insurance premiums. Under this system, a speeding conviction on its own would not have resulted in an increased premium; however, when the insured first took out the policy with Provident, he disclosed that his wife had been involved in an accident the previous year. At that time the claim had not been settled, and thus the broker stated on the proposal form that it was a 'fault accident.' Using Provident's points system, a recent 'fault' accident and the speeding conviction together would have resulted in an increased premium.

When Provident gave notice to avoid the insured's policy, it was under the impression that the earlier accident was a 'fault accident.' However, when the insured challenged the recission, Drake produced evidence that the accident was in fact a 'no fault' accident and that he had received compensation from the other driver. A 'no fault accident' and the speeding conviction would not have altered the insured's premium

The Court of Appeal held that Provident was not entitled to avoid the policy for non-disclosure because it had not proved that the non-disclosure of the speeding conviction induced the contract. In reaching that conclusion, their Lordships considered several issues: (1) Was Provident entitled to avoid its policy? (2) Was Provident's fight to avoid limited by the doctrine of good faith? (3) How did waiver and reinstatement apply? and (4) Was Drake a volunteer? The second issue regarding the doctrine of good faith remains the focus of this article. Was the insurer (who at the time avoided the policy in good faith) allowed to maintain the recission after the true facts came to light: does the principle of good faith apply equally to the insurer? This article examines the way courts have dealt with this question in the past and the implications arising from Drake v. Provident in the future.

What Is Good Faith?

Rix LJ stated: If it is right to allow that circumstances could arise where an insurer would not be in good faith by acting on a prima facie right to avoid for non-disclosure, then the question would have to be faced as to the conceptual analysis whereby an exercise of a fight to avoid could be invalidated by the insurer's bad faith. (1) The duty of good faith as it applied to marine insurance, was first codified by statute in Section 17 of the Marine Insurance Act 1906 ("MIA"), which states that "[a] contract of marine insurance is based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party." (2)

This quote from the MIA is widely-accepted as an accurate statement of the common law position on good faith, and therefore this duty applies to all insurance contracts. Good faith applies equally to the insurer and the insured, as confirmed in the case of Leen v. Hall, (3) and reconfirmed in Banque Keyser Ullmann SA v. Skandia (UK) Insurance Co Ltd. (4) However, English case law shows that the duty has been used largely to protect the insurer against the insured because the insured is in a stronger position than the insurer to know all of the facts. The lack of equality in insurance contracts does not come from the size or experience of the parties, but from the access to relevant information.

Under English insurance law, the duty of good faith has two basic elements: (a) a duty to refrain from making material misstatements and (b) a duty to disclose all known material facts.

Duty to Disclose

The MIA states:

The assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract. (5)

While this seems to only impose a duty on the assured, the provision has been interpreted to apply to both parties to the insurance contract. As Lord Mansfield stated in 1766 in Carter v. Boehm:

Good faith is the governing principle applicable to all contracts of insurance. Good faith forbids either party by concealing what he privately knows to draw the other into a bargain from his ignorance of the fact and his believing the contrary ... The keeping back such circumstance is a fraud and therefore the policy is void. (6) Since Carter v. Boehm, courts have stringently applied the principle of good faith to all levels of material...