UTMOST GOOD FAITH
CILA
CH 1 – Introduction to the Insurance Industry
36
Utmost Good Faith
6. UTMOST GOOD FAITH
Contents
6.1
The Principle
6.2
The Legal Position Case Law
6.3
How Utmost Good Faith is Applied in Practice
6.4
Breach of Utmost Good Faith
6.5
Key Points to Remember
Introduction
Utmost good faith is a key principle of insurance. It is concerned with the information that
is disclosed by the parties who are involved in the insurance contract. If a party fails to
adhere to the principle of utmost good faith, the outcome of the claim may be affected.
This section explains what is meant by utmost good faith, how it is applied in practice and
what happens when it is breached.
6.1 The Principle
Contracts, in general, are subject to the doctrine of caveat emptor (let the buyer
beware). This means that each party must ask questions to ensure that they have all the
information they need before signing the contract. Statutes such as the Sale of Goods Act
1979 and the Unfair Contract Terms Act 1977 affect what must be supplied. Also, there
must be no misrepresentation or fraud.
Insurance contracts are not based on the principle of caveat emptor. Those involved
in negotiations for an insurance contract must disclose all relevant information to all
the other parties in the negotiation. This is particularly important because relevant
information will typically only be known to one party to the contract, that is, the proposer
or Policyholder. This is the principle of uberrima fides or utmost good faith.
Activity
Think about the type of information that might be relevant to an insurance
company when deciding whether to accept a risk or calculating the premium
to charge.
Consider a home buildings policy which provides cover against Fire, Theft
and Flood. What features of the building would be relevant to the insurance
company and why?
6.2 The Legal Position
Case Law
The principles of what must be disclosed were established in the case of Carter v Boehm
(1766):
The proposer must disclose all material facts
Material facts are those that would influence an underwriter as to whether he should
or should not accept the risk
37
CILA
CH 1 – Introduction to the Insurance Industry
The proposer does not need to disclose what the underwriter ought to know
The proposer is not required to disclose things he could not know.
These have been codified in the Marine Insurance Act 1906:
Clause 17 - A contract of marine insurance is a contract based upon the utmost
good faith, and, if the utmost good faith being not observed by either party, the
contract may be avoided by the other party.
Clause 18(1) - Subject to the provisions of this section, 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.
Clause 18(2) - Every circumstance is material which would influence the judgment
of a prudent insurer in fixing the premium, or determining whether he will take
the risk.
Clause 18(3) - In the absence of inquiry the following circumstances need not be
disclosed, namely:
(a) Any circumstance which diminishes the risk;
(b) Any circumstance which is known or presumed to be known to the insurer.
The insurer is presumed to know matters of common notoriety or knowledge,
and matters which an insurer in the ordinary course of his business, as such,
ought to know;
(c) Any circumstance as to which information is waived by the insurer;
(d) Any circumstance which it is superfluous to disclose by reason of any express
or implied warranty.
Clause 18(4) - Whether any particular circumstance, which is not disclosed, be
material or not is, in each case, a question of fact.
Clause 18(5) - The term “circumstance” includes any communication made to, or
information received, by the assured.”
6.3 How Utmost Good Faith is Applied in Practice
Examples of facts which need NOT be disclosed by the Insured or Insurer:
Facts of law
Facts which the Insurer should know (eg common knowledge, current affairs)
Facts which lessen the risk (security fittings, sprinklers, alarms)
Facts which the Insurer should have noticed from other information given (eg if the
proposer has referred to other records)
Facts related to the Insurer’s survey
Facts covered by policy conditions
Facts which the proposer could not reasonably be expected to know
Convictions which have been spent under the Rehabilitation of Offenders Act 1974.
Facts which must be disclosed:
Facts which make a risk greater than usual
Facts which would increase the possibility of a loss
38
Utmost Good Faith
Previous claims or losses
Facts which reduce an Insurer’s subrogation rights
The existence of other Policies
Facts relating to and descriptions of the subject matter of the insurance.
Activity
Taking note of the above, consider a restaurant policy which provides cover
for contents, fixtures and fittings, and stock. Which of the following facts
must the restaurateur disclose to his Insurers:
1. The neighbouring properties are a hardware shop and a Post Office
2. The restaurant suffered a fire 2 years ago
3. A sprinkler system was installed after the fire
4. The value of the wines and spirits held on the premises
5. Agency waiting staff are used on a regular basis.
UK Legal Cases continue to confirm the Principles
In Lambert v Cooperative Insurance Society (1975), it was confirmed that the prudent
insurer test in Section 18 of the Marine Insurance Act 1906 not only applies in connection
with non-marine matters, but is still the relevant test.
Utmost Good Faith at the Claims Stage
There is a limited duty of utmost good faith at the claims stage. It is effectively confined
to a duty not to make a fraudulent claim, see Orakpo v Barclays Insurance Services Co Ltd
(1996) and Galloway v Guardian Royal Exchange (1997).
Impact of Proposal Forms
If information is waived, for example by insurers asking only certain questions in their
proposal form, there may be no duty on the proposer to volunteer additional information
(unless there is a general question asking if there is anything else that should be
disclosed).
Activity
Obtain an insurance proposal form and review the questions asked by
Insurers. Look for any additional statements that ask the proposer to
provide any further information that is material or relevant.
Utmost Good Faith applies to Insurers
Other case law, notably Banque Financiere de la Cite SA v Westgate Insurance Company
Ltd (1988) confirmed that the duty of disclosure is mutual. Both proposer (or policyholder
if there is a change in risk during the currency of the policy or at renewal) and insurer
must disclose all material facts.
6.4 Breach of Utmost Good Faith
The remedy for non-disclosure of a material fact is that the Policy is voidable (in other
words it can be affirmed or rescinded) at the option of the aggrieved party.
39
CILA
CH 1 – Introduction to the Insurance Industry
As the non-disclosure is usually on the part of the proposer/Policyholder, the initiative is
with the Insurer. If the Policy is avoided, the Policy is treated as if it had never come into
effect and any claims paid should be refunded to the Insurer and the premium returned to
the Policyholder.
The following cases give useful examples of non-disclosure:
Carter v Boehm (1766)
Farnham v Royal Insurance Co Ltd (1976)
Kausar v Eagle Star Insurance Co Ltd (1997)
James v CGU Insurance PLC (2001)
Lambert v Co-operative Insurance Society Ltd (1975)
Locker & Woolf Ltd v Western Australian Insurance Co Ltd (1936)
Mitchell v Scottish Eagle Insurance Co (1996)
Simner v New India Assurance Co Ltd (1994)
Woolcott v Sun Alliance & London Insurance Ltd (1978).
The strict legal position in the UK is amended by the ABI Statement of General Insurance
Practice, in relation to persons insuring in their private capacity.
Under this agreement, members of the ABI will not repudiate liability to indemnify a
Policyholder on grounds of non-disclosure of a material fact which a policyholder could not
reasonably be expected to have disclosed, or on grounds of misrepresentation unless it is a
deliberate or negligent misrepresentation of a material fact.
The Rehabilitation of Offenders Act 1974 is also relevant. The Act provides that, when
the rehabilitation period has expired, certain convictions need not be disclosed. The
rehabilitated person can then truthfully answer “no” to any question relating to his
criminal history or, if no specific question is asked, he has no need to volunteer his
criminal record.
Activity
Consider the handling of a claim and how the process may reveal facts that
were not disclosed at proposal stage. In particular, think about the type of
information you obtain from a Policyholder either on the telephone, via
correspondence or during a visit to their property. How would you check
whether this information had previously been disclosed?
Ask your colleagues for examples of non-disclosed material facts. Find out
how they dealt with the issue and whether it had an impact on the claim.
6.5 Key Points to Remember
If you suspect non-disclosure or misrepresentation, you will need to:
Check the proposal (including any correspondence generated at the proposal stage)
and any documentation generated at renewal or on any change to the policy
Verify the answers given on the proposal or at renewal
Check to see whether the ABI’s Statement of General Insurance Practice applies
Check to see whether the Insurance Ombudsman’s Guidelines assist.
40