UTMOST GOOD FAITH Lecture 18 Week 9
UBERIMMAE FIDEI • Contracts of insurance are fiduciary contracts - they involve a promise. • This means they are contracts “uberrimae fidea” - contracts of the utmost good faith • This doctrine accepted to different degrees in most common law countries.
BEGINNINGS • Carter v. Boehm (1766) • “The reason of the rule which obliges one party to disclose is to prevent fraud and encourage good faith”. • One party knows all of the facts (the insured) the other needs to know all the facts (The insurer)
THE RULE • The parties to the fiduciary contract • must disclose • all material facts • else the contract is voidable on the part of the aggrieved party • that is it never existed. • Distinguish between fraudulent and innocent misrepresentation
WHO DISCLOSES • The proposer and/or his agent should disclose. • An agent who fails to disclose a material fact can be held liable for breach of professional duty • The duty works both ways the insurer would also have to disclose any material facts • Pan Atlantic v. Pine Top Ins Co (1994)
WHEN TO DISCLOSE • Disclosure only required throughout contract • Extent depends on relationship • This includes renewal or change of the policy disclosure arises (Manifest shipping v. Uni-Polaris (1995) • This may be amended by policy conditions, eg clause requiring notification of changes
WHAT TO DISCLOSE • All material facts • The definition of material facts in various jurisdictions ranges from the reasonable insured to the reasonable insurer test. • Reasonable insured is what a reasonable proposer would reveal • Reasonable insurer is what a reasonable underwriter needs to underwrite the risk.
MARINE INSURANCE ACT 1906 • Confirmed existence of rule. • Defined material fact as • Every circumstance is material which would influence the judgment of a prudent underwriter in fixing the premium or determining whether he will take the risk. • This prudent insurer test
CTI v. OCEANUS (1984) • “any circumstance is material i.e. is one which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk if it is a circumstance which would have had an impact on the formation of his opinion and on his decision-making process”
PAN ATLANTIC v. PINE TOP (1993) • Two steps • “A circumstance may be material even though a full and accurate disclosure of it would not in itself have a decisive effect on the prudent insurer’s decision whether to accept the risk and if so at what premium”
PAN ATLANTIC v. PINE TOP • If the misrepresentation or the non-disclosure of a material fact did not in fact induce the making of the contract…the insurer is not entitled to rely on it as a ground for avoiding the contract.”
IRISH TEST • Has undergone development • Chariot Inns v. Assicurazioni Generali SPA (1981) • This the first decision apparently accepting the English law.
CHARIOT INNS • “It is a matter of circumstance which wold reasonably influence the judgment of a prudent insurer in deciding whether he would take the risk, and if so, in determining the premium which he would demand. • The standard by which materiality is to be determined is objective and not subjective. The matter has to be settled by the courts.
HARNEY v. THE CENTURY INS (1983) • Insured received letter of acceptance from health insurer agreeing to come on risk once premium paid • Insured visited doctor for chest pains before paying premium and did not tell insurer • After payment of premium insured became much worse and was in hospital and sick for a year
JUDGEMENT • Test of material fact is: • whether if the fact concealed had been disclosed the insurer would have acted differently either by declining the risk at the proposed premium or at least delaying acceptance • If the former were established then insurers could void if latter they could not • Held insurers would have delayed risk and therefore could not void policy.
ARO ROAD v.ICI (1986) • “If the judgment of an insurer is such as to require disclosure of what he thinks is relevant but which a reasonable insured, if he though of it at all, would not think relevant, then, in the absence of a question directed towards the disclosure of such a fact the insurer, albeit prudent cannot properly to be held to be acting reasonably”. • The prudent insured test
NEED NOT BE DISCLOSED • Common knowledge • Things that reduce the risk • Things known to the insurer • Constructive knowledge • There are things which insurers can be presumed to know • Business practice • Waiver
WARRANTIES AS TO MATERIAL FACTS • Proposal forms used to contain a clause warranting the truth of statements in this document • The statements of insurance practice now prohibits this practice.