The duty of utmost good faith in insurance law: where is it in the 21st century? The historical background of good and bad faith continues to develop in English law, especially in two recent maritime cases.

• Author: Woloniecki, Jan

THE duty of good faith in insurance law, first enunciated by Lord Mansfield in 1766 in Carter v. Boehm, predates the coming into existence of the United States. Yet, more than 200 years of English legal history have not solved all the problems that arise from the lack of good faith of insureds and sometimes of insurers and the ingenuity of their legal advisers. As recently as 1996, the House of Lords were split 3-2 over fundamental questions on the duty of disclosure.

Two important recent English decisions--The "Star Sea" (1) and The "Mercandian Continent," (2) which concern marine insurance but are of general application to all forms of insurance and reinsurance--address this issue: Does the duty of good faith continue after the making of the contract of insurance, and if so what are the consequences if it is breached?

A LOOK AT HISTORY

In Carter v. Boehm, Lord Mansfield said:

Insurance is a contract of speculation. The special facts upon which the contingent chance is to be computed lie most commonly in the knowledge of the assured 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 circumstances do not exist. The keeping back of such circumstances is 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 risque run is really different from the risque understood and intended to be run at the time of agreement.... The policy would be equally void against the underwriter if he concealed. ... 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. (3) Carter v. Boehm concerned the pre-contractual duty of disclosure. Lord Mansfield did not consider the duties of the parties to one another after the contract had been made. Most of the 19th century cases concern breaches of the duty of good faith by reason of non-disclosure or misrepresentation at the time of the making of the contract. It was understood to be the law, however, that there was no obligation on an assured to disclose to the underwriter facts material to the risk that came to the assured's knowledge after the contract was made. (4)

MARINE INSURANCE ACT 1906

The Marine Insurance Act 1906 (MIA), as its name suggests, is generally confined to marine insurance. However, the House of Lords has held that Sections 17 to 20 of the MIA codify the common law and apply to all forms of insurance and reinsurance. (5) Section 17 of the MIA provides:

A contract of marine insurance is a contract based upon the utmost good faith, and if the utmost good faith be not observed by either party, the contract may avoided by the other party. Sections 18-20 of the MIA address the pre-contractual duty of good faith at more length. Section 18 deals with disclosure by the assured, Section 19 with disclosure by agents to insure, and Section 20 deals with misrepresentation.

CONTINUING DUTY?

Does the duty of utmost good faith continue after the contract is made? Sections 18 and 20 of the MIA both refer to the situation "continuing before the contract is concluded." Section 17 contains no such limiting language.

1. The "Litsion Pride"

   In Black King Shipping Corp. v. Massie (The "Litsion Pride"), Hirst J. said that "the duty of utmost good faith applied with its full rigour" in relation to the giving of information by the assured to the underwriter about the voyage of a vessel under a policy that required the giving of such information. (6)

   In this case, the assured ship owners failed to disclose to the underwriters that the vessel was about to enter a dangerous part of the Persian Gulf so as to avoid having to pay a higher war risks premium. The vessel was struck by an Iraqi missile, and the owners then presented a fraudulent claim by lying to the underwriters about the vessel's position at the time of the casualty.

   The court held that the underwriters were entitled either to avoid the policy for fraud or deny the particular claim. Hirst J. said:

   So far as claims are concerned, I consider that the general principle requiring utmost good faith must apply also.... In contrast to the pre-contract situation, the precise ambit of the duty in the claims context has not been developed by the authorities; indeed no case has been cited to me where it was considered outside the fraud context in relation to claims. It must be right, I think ... to hold that the duty in claims sphere extends to culpable misrepresentation or non-disclosure. Further than that there is no need to go on the facts of the present case.... I hold that any fraudulent statement which would influence a prudent underwriter's decision to accept reject or compromise the claim, is material. (7) In Bucks Printing Press Ltd. v. Prudential Assurance Co., Saville J. was prepared to extend the concept of "culpable misrepresentation or non-disclosure" by an assured seeking to obtain payment of a claim to recklessness. (8) However, the suggestion that the making of an exaggerated, but not fraudulent, claim entitled underwriters to avoid did not find favour with the Court of Appeal. (9)

2. The "Star Sea"

   In Manifest Shipping Co. Ltd. v. UniPolaris Insurance Co. Ltd. (The "Star Sea"), (10) Greek shipowners sued underwriters under a marine policy following the constructive total loss of their vessel as a result of a fire. The underwriters raised two defences.

   First, they relied on Section 39(5) of the MIA, which provides a defence to liability where, "with the privity of the assured, the ship is sent to sea in an unseaworthy state." The underwriters alleged that the owners had "blind-eye knowledge" of the unseaworthy condition of the vessel--namely, defective funnel dampers--which meant that the engine room could not be sealed, and the fact that the fire extinguishing system had been poorly maintained and was not working properly.

   Second, they relied on Section 17 of the MIA, alleging that the owners were in breach of the duty of utmost good faith by failing to disclose the facts relating to an earlier fire aboard another vessel, Kastora, at the time the underwriters' solicitors were investigating the Star Sea claim.

   Tuckey J. found in favour of the underwriters on the unseaworthiness point but concluded that the Section 17 point failed both on the law and the facts. Both sides appealed. The Court of Appeal reversed certain of Tuckey J.'s findings of fact on the unseaworthiness point, dismissed the underwriters' cross-appeal on the section 17 point, and entered...