Principle of Mutual Responsibility of Disclosure - Case Study Example

Critically assess how the courts have both developed and interpreted the duty of disclosure to which both lord Mustill and Mansfield make reference.Duty of disclosure is fundamental to any insurance contract and stems from the principle of utmost good faith expected from both the parties to the insurance contract i.e. the assured and the insurer. The principle of good faith known as “uberrimae fidei” is thrust upon the parties to the insurance contract as the contract is based on speculation. The rule of utmost good faith had been first established by Lord Mansfield in Carter v Boehm 1 long before enactment Marine Insurance Act 1906 as stipulated in section 17. The duty is rather reciprocal as stated both in section 17 as well as by Lord Mansfield. Lord Mansfield though rejected Carter’s claim for not having disclosed the material facts, he cited an example of the insurer insuring the ship knowing full well that it had already arrived. He observed that good faith prohibited either party from hiding the fact so as to tempt the other into a bargain. The principle of mutual responsibility of disclosure was challenged by the underwriters in Banque financiere de la Cite SA v Westgate Insurance Company Ltd2. Although a non- marine case, it may be relevant for the purpose of utmost good faith principle. A group of banks advanced monies to four companies represented by one Mr Ballestro on the basis credit insurance policies. The gemstones deposited as security for the loan turned out to be fake with the result the insurers avoided the claim citing fraud exclusion clause. Bank sought to still claim for the reason that the insurers had breached their duty of utmost good faith by not disclosing the fraud committed by one Mr Lee who had been an employee of the brokers. Though the courts of first instance and appeal upheld the claim of the Bank, House of Lords reversed the decision on other grounds than the mutuality of good faith. Further, the duty of good faith exists only between the assured and the insurer who are original parties to the contract of insurance. In Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda), ‘Good Luck’3, it was held by the Court of First Instance that there was no duty of good faith between the Insurers and the Bank who were only mortgagees and assignees of the insurance policy. Since the assignee cannot have better rights than the assignor who was the assured in this case, insurers did not owe a duty to the assignee. The court of first instance observed that assignee could claim only if the insurer had failed in his obligation of disclosure to the assignor. Where the assignee steps into the shoes of the assignor and the insurer fails in his duty of utmost good faith, the assignee can claim against the insurer. But the situation in the above Good Luck case was a mere assignment and hence it was held that it was not sufficient to create such a duty.4 The principle of mutual utmost good faith enshrined in section 17 of the Marine Insurance Act received judicial scrutiny under marine insurance only in 1985 in the case of Black King Shipping Corporation v Massie, Litsion Pride5. It was finally clarified in the case that duty of disclosure was derived from the duty of utmost good faith and not vice versa. The duty of utmost of good faith is an independent and overriding duty with subsequent sections on disclosure as illustration of that duty. Section 17 of the Act is wider and all embracing in that the duty of utmost good faith is a continuing one. The Litsion Pride case is credited with development of law on utmost good faith. In fact the overriding duty was recognized in the earlier case of Container Transport International Inc and Reliance Group v Oceanus Mutual Underwriting Association (Bermuda ) Ltd itself. 6 However this overriding principle was subjected to much criticisms and was overruled later in 1994, on the important points of materiality and inducement in Pan Atlantic Insurance Company Ltd v Pine Top Insurance Company Ltd [1994]7 In this case involving an insurer and a reinsurer, the appellant insurers reinsured with Pine Top Insurance Company, the excess of loss on their direct American liability insurance between 1977 and 1982 and this was a long-tail business as the claims could be known only after a long time and settlement took even longer. For the year 1980 and 1981, the appellants reinsured for a certain amount. For the subsequent year’s renewal, the appellant’s broker misrepresented that there was a possibility of a reduced premium by presenting the loss record for the short period of 1980-81 instead of disclosing the long record of 1977 to 1979 when there was no risk for the reinsurer. The short record loss was shown as $ US 235,768 as against the actual loss of $ US 468,168. The reinsurers refused to accept the claim for the reason of material non-disclosure. When the appellants brought action against the reinsurers, section 18(2) of Marine Insurance Act was applied to find out whether non-disclosure had influenced the prudent reinsurer by fixing a lesser premium or he would take the risk. The judge opined that there was no material non-disclosure as far as the long record since the reinsurer could have called for the same. It was however held that the short statement of the loss for the year 1980-81 was a clear material non-disclosure and hence the respondent was entitled to avoid the contract. On appeal, the House of Lords dismissed the appeal for the reasons that section 18(2) provided the natural and ordinary meaning that any non-disclosure of material fact would have had an impact on the decision of the reinsurer. That is whether to accept the risk or not and if to accept, at what premium. Thus the section 18(2) thrust an important duty on the assured, here the appellants, to disclose all material facts. A distinction was made from the decision in Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd by pointing out that the material non-disclosure should have induced the underwriter to accept the risk. Thus an underwriter who was not induced by the misrepresentation was not entitled to rely on section 18(2). As in the present case of Pan Atlantic, there was material non- disclosure which induced the reinsurer, the respondent reinsurer was entitled to avoid the contract for the year 1982.8 Conclusion It is reasonable to assume that material non-disclosure should be deliberate and fraudulent in order to entitle an insurer to avoid the contract of insurance. It is inconceivable how an innocent non-disclosure could be taken as fraudulent misrepresentation. The duty of utmost good faith which formed the basis for any contract formation as proposed by Lord Mansfield, is now confined only to the contract of insurance be it marine or any other. The subsequent decisions have shown that utmost good faith principle and the principle of material non-disclosure are independent of each other. Further Lord Mustil’s decision implies that inducement is required not only for misrepresentation but also for material non-disclosure for which there is no rationale. The inducement for non-disclosure is strange in contract law. It is not clear how an undisclosed fact can actually induce an insurer to enter into a contract. Further, the insurer is capable of knowing all the facts of the insured through public records and data and the insurer decides on the premium mostly on the basis market data. Hence any material non-disclosure need not really induce the insurer to enter into a contract since he is capable of knowing through other channels and it must be assumed that he has knowingly entered into the contract. Thus the utmost good faith principle has it that he should avoid the contract if he knows that it would be adversarial for him. He takes the contract still only for the purpose of procurement of business and hence he should be expected to share the risk attached the business insured. In Container Transport International Inc and Reliance Group v Oceanus Mutual Underwriting Association (Bermuda ) Ltd, it had been held that there was no need to show that the misrepresented fact or non-disclosed fact did influence the mind of the insurer. Thus the range case laws ever since Carter v. Boehm has developed in favour of the insurer to enable him to avoid the contract at the slightest excuse. Bibliography Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda), ‘Good Luck’ [1988] 1 Lloyd’s Rep 514 Banque financiere de la Cite SA v Westgate Insurance Company Ltd [1987] 1 Lloyd’s rep 69; [1988] 2 Lloyd’s Rep 513; [1990] 2 Lloyd’s Rep 377, HL Black King Shipping Corporation v Massie, Litsion Pride [1985] 1 Lloyd’s Rep 437 Carter -v- Boehm [l766] 3 Burr 1905 Container Transport International Inc and Reliance Group v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476, CA. Hodges Susan and Carlile Roy, Cases and materials on marine insurance law, p 216, Routledge, 1999 LA 210-Commercial law cases- available at accessed 21 February 2010 Pan Atlantic Insurance Company Ltd v Pine Top Insurance Company Ltd [1994] 2 Lloyd’s Rep 427, HL Read More