The Interpretation of the Duty of Disclosure - Essay Example

Duty of Disclosure Introduction: Marine insurance covers the risks involved in transit over the sea and the insurer agrees to indemnify the party insured in a manner prescribed within a contract against losses to ships and property that may occur out at sea due to fire, shipwreck or natural calamities, but excludes the losses that are recoverable from the carrier1. Marine insurance is the oldest kind of insurance and is based upon the principles of common law that allow the parties a great deal of freedom in contracting among themselves. In the year 1906, the standardization of insurance policy coupled with judicial precedent led to the codification of the common law as the Marine Insurance Act. One of the notable ways in which marine insurance differs from other kinds of contracts is in the difference between the way conditions and warranties are treated. While under contract law, the breaching of a contractual condition can lead to a repudiation of contract but a breach of warranty does not allow such repudiation because a warranty is not fundamental to a contract. With a marine insurance contract however, the conditions are reversed and certain implied warranties, such as ensuring that the ship being insured is sea worthy2, will become as capable of enforcement as a contractual condition, with the provision for voiding of the contract in the event of a breach. Where marine insurance is concerned, the contractual principle underlying such contracts is not that of Caveat Emptor (Buyer Beware) as in the usual contracts, rather these contracts are based upon the uberrimae fides which is the requirement of good faith from both sides, as a result of which all information pertaining to potential risks must be disclosed fully and a failure to do so would be construed as concealment of relevant information, which is a valid ground for an insurer to void an insurance contract. The duty of Disclosure: The duties of disclosure are embodied in sections 18 and 19 of the Marine Insurance Act of 1906. Section 18 is primarily concerned with the duty of disclosure that is due from the insured while section 19 concerns the duty of disclosure that fall upon an agent who in involved in the process of getting a party insured. Section 20 underlies the “expectation or belief” of honesty that is implicit in the duty of disclosure placed upon an insured, so that representations are to be made in good faith.3 Since the question of marine insurance generally arises among parties that are in the shipping business, there is an underlying assumption behind the duty of disclosure wherein the parties are obliged to disclose every material circumstance that may be known to them and such material circumstances will also include those aspects that they can reasonably predict as a result of their knowledge in the business. Therefore, there is an obligation to disclosure all information that the potential insured sees as potentially impacting upon the nature of insurance protection being provided. Section 18 (1) 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 to him. If the assured fails to make such disclosure, the insurer may avoid the contract.” Under Section 5, the term “circumstance” as spelt out above clarifies that this also includes “any communication made to, or information received by, the assured.” Section 19 (1), being concerned with the agent rather than the primary insured, states that the assured must disclose: (a) every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and (b) every material circumstance which the assured is bound to disclose, unless it come to his knowledge too late to communicate it to the agent." Therefore, as opposed to ordinary contracts, where a failure to disclose certain information for non fraudulent reasons may be excused, this will not be so in marine insurance contracts which can be voided on grounds of non disclosure or concealment of information. As clarified by Chitty4 an insured may also be under a duty to disclose information that may be known to his agent in certain kinds of situations, such as for example (a) where an insured relied upon information that he acquired from an agent, even if he does not ultimately use the agent, since the agent is supposedly one who knows and is an expert on insurance matters (b) where the agent knows so much about the insured that what he knows about the insured is relevant and disclosable and (c) in the case of acquisition of insurance concluded through an agent, in which case there is a duty placed upon the insured person to disclose all information known to him and to the agent, which would also include those circumstances and risks that the agent, by virtue of his position as an expert in insurance matters, would be expected to know. These three kinds of situations were also identified in the case of Simner v New India Assurance Co Ltd.5 Case law: In the case of Lambert v Co-Operative Insurance Society Ltd6 the major issue under consideration was not marine insurance, but insurance against theft. But the judges expressed the opinion7 that the provisions of section 18 of the marine insurance act setting out the rules of non disclosure were universal and should also apply to all other instances where risks were involved, such as fire and theft. In the case of Life Association of Scotland v Foster8 the exceptional nature of insurance contracts was pointed out – they require unberrimae fides on both sides, which is a contract based upon the utmost extent of good faith between the parties. This places upon the insured, a solemn obligation to carefully review all the facts known to him which could pose a risk to the insurers. Failure to disclose pertinent information could be innocent rather than fraudulent in nature, but from the perspective of a contract of insurance it could constitute a failure in disclosure which could lead to a voidance of the contract. Therefore, the duty of disclosure arises out of the good faith that underlies marine insurance contracts. One aspect in which UK marine insurance law differs from marine insurance in the USA, is the element of good faith required from both parties, which propels the duty of disclosure as spelt out under section 18 of the Act. In the United States the duty of good faith is sent to be relevant only at the time a contract is entered into or renewed9, however as opposed to this, English law has seen the duty of good faith being carried forward on a continuing basis up to the point of claim10. Section 17 of the Marine Insurance Act of 1906 allows for the voiding of a contract during litigation11 by a party that can claim grounds of non disclosure of information even after the contract has been signed by both parties because of this aspect of continuing good faith that underlies the duty of disclosure. Therefore, the duty of disclosure is much more relevant in English law, which is based upon common law principles that have formed the basis of much of marine insurance all over the world. When a party seeks insurance, it is therefore mandatory for that party, as a measure of good faith to disclose all relevant information and such a person may not merely restrict his responses and disclosure to information to answering the questions that are asked by the insurance Company. The area of disclosure is a contentious one, because the question of what would constitute a failure to disclose is difficult to determine. For example, a party that is proposing insurance may be aware of the potential risks he may incur, yet would he be obliged to divulge this information to the insurer when it may be presumed that the insurer will already have such information available to him? As stated by Lord Mansfield in the case of Noble v Kennaway12 an insurer “is presumed to be acquainted with the practice of the trade he insures.” The question of the insurer’s knowledge was at issue in the case of The Moonacre13 where pleasure boats were being stored in Spain during the winter and the insurer was expected to be aware of the risk for theft and vandalism of the boats, hence there was no failure to disclosure on the part of the insured party. In the case of Lean v Hall14 it was stated that an insurer is expected to be aware of the important development occurring during the contract period which could have a bearing upon the risks that could potentially incurred by the provision of insurance. In the case of Bates v Hewitt15, the insurer was not expected to make a connection between events occurring too far in the past and potential risks to a current contract. In this case however, Cockburn LJ emphasized the need to reiterate the duty of good faith between the parties and require full disclosure from potential assureds rather than relying upon what an insurer should or should not be expected to know – stating that “if we were to sanction such a course, especially in these days, when parties frequently forget the rules of mercantile faith and honor……we should be lending ourselves to innovations of a dangerous and monstrous character….”16 The contract of marine insurance involves the indemnification of losses, therefore the possession of knowledge is a vital element in assessing the element of risk pertaining to each transaction. This is why disclosure is given so much importance in marine insurance law, because an accurate estimate can be made of potential losses that could conceivably occur. Lord Ellenborough has clarified the nature of an insurance contract in the case of Brotherston v Barber17 – “the underwriter does not stipulate under any circumstances, to become the purchaser of the subject matter insured…he is to indemnify only.” While in an ideal situation, an insured would be compensated only to the extent of the loss that he has actually incurred18; however in practice this is not easy to achieve, as a result of which a policy of insurance is not a perfect contract of indemnity19. On the principle of utmost good faith of both the parties, the insurer also has a duty of full disclosure, as laid out in the case of Banque Financierie de la Cite SA v Westgate Insurance Co Ltd.20 Material facts: Where the question of voiding a contract for reasons of failure to disclose relevant facts arises, liability can be eschewed by the insurer only if the matter that remain undisclosed was of a nature that would have impelled an insurer to refuse to accept the risk, or accept it on different conditions.20 The duty of disclosure requires that very material fact must be disclosed prior to entering into the contract and this duty of good faith continues through the duration of the contract. The objective test of materiality was set out by Lord Mustill in the case of Pan Atlantic Insurance Co v Pine Top Insurance Co21, where a fact or circumstance is deemed to be material only if it would influence the judgment of the insurer in determining the premium and in evaluating whether or not wishes to assume the risk. It is not deemed necessary to demonstrate that the disclosure would have had a conclusive or distinctly decisive influence in the outcome of the claim or contract of insurance. Moreover, certain facts may be such that they are understood or known to both parties and as a result may not be grounds for claims of refusal to pay on grounds of non disclosure. One such as aspect is the valuation of the hull on the basis of which the insurance amounts are derived. Arnould states as follows: “Cases, however, rarely occur in which the insurers seek to avoid a policy on a ship on the ground that there was no disclosure of the fact that the valuation therein was excessive, because the insurers usually have ample information about the vessel, which enables them to form a fairly accurate estimate of her value.”22 On this basis therefore, the question of valuation of the hull would be a non material fact , wherein an insurer is unlikely to be adversely affected by the non disclosure of the true value of the vessel23, since he is able to derive a fairly accurate estimate of its value on the basis of market and other inspection informational sources available to him. In so far as materiality of the non disclosed information is concerned, it will be relevant only when such failure results in the non availability of information the assured was uniquely qualified to provide, including “….his own statement of his innocence and such independent evidence as he had to support that by the time of placing…”24 As opposed to information such as hull value which can be generally gleaned by the insurer from his own sources, information that the insured is in a position to provide could be significant because it could influence the decision of the insurer in whether or not to accept the risk involved.25 In the case of North Star Shipping Ltd and Others v Sphere Drake Insurance plc and others26 there was a dispute about covering the losses incurred on an explosion aboard the ship, because it was deliberately caused solely for the purpose of claiming damages from insurance. Therefore, the insurers refused to pay the claim on the grounds of misrepresentation and non disclosure. In arriving at a decision of the case, the duty of disclosure as spelt out under section 18 of the Marine Insurance Act was examined and it was pointed out that when there are criminal proceedings that are continuing or have been carried out against members of the crew for example, such events should form a part of the disclosure in order to enable the insurers to better evaluate the risks. The Court referred to the case of The Grecia Express in which the disclosure of expulcatory evidence became a relevant factor in the insurer’s assessment of risk, since it provided lots of evidence for the insurer to take into account before making the decision to insure. In the case of North Star, the issue at stake was the criminal allegations that had been made against two crew members in Greece and the Court held that this should have been disclosed in the interest of determining moral hazards in taking up the risks for insuring the ship, especially during war time. This issue was especially relevant in view of the fact that the claim being made was on a destructive act suspected to be arson. The criminal allegations and proceedings against those crew members, albeit expulcatory, could not be exempted from disclosure on the grounds that the incidents were not current. It was stated as follows: “…..in the case of allegations of fraud in the course of pending proceedings, criminal or civil, the attribute of materiality is not diminished by exculpatory evidence. Such evidence would, in my judgment, go only to inducement in relation to which the question would have to be asked whether the underwriter was induced to write the risk by the failure to disclose information as to the material facts and such exculpatory evidence as would probably have been presented with it.”27 This case therefore typically demonstrates that any kind of information that could be relevant in a claim or in influencing the decision of the under writer to accept or refuse the risk involved in taking up a policy will fall under the purview of evidence that must be disclosed, and where failure to disclose such information could vitiate the contract. This case also highlighted the difficulties in assessing which kind of information would be construed to be material and relevant to be disclosed, since one of the arguments raise din this case was that if additional information was required by the under writers, they could always seek such information before underwriting the policy, rather than waiting for a claim before contesting it on grounds of non disclosure of material facts. Another aspect that has been confusing is on the issue of whether or not disclosure of adverse facts was mandated after the time the underwriter had first accepted the risk by initialing the slip but before the final and legally binding policy had been produced. In this respect Blackburn J expressed the view that the underwriter is not in a position to depart from “the terms thus agreed on [in the slip] without a breach of faith.”28 This view is reinforced in section 21 of the Marine Insurance Act which states that a contract will be “deemed to be concluded when the proposal of the assured is accepted by the insurer, whether the policy be then issued or not; and, for the purpose of showing when the proposal was accepted, reference may be made to the slip….” This issue was also raised in the case of Bonner and Others v Cox and Others29 where it was pointed out that the duty of disclosure as laid out in sections 18 and 19 of the Marine Insurance Act will govern the conduct and evidence required in formulation of the contract, however once the contract is concluded it will be governed by the terms inherent within the contract rather than relying on extraneous elements, thereby mitigating the value and importance of the duty of disclosure. Applying section 18 of the Marine Insurance to an insurance contract, it would appear that full and complete disclosure is required, including those elements that lie within the knowledge of the person/s seeking insurance. However, Section 21 appears to suggest that such duty of disclosure would be valid only up to the point where the contract is signed, thereby apparently reiterating the position laid down in US marine insurance law where the duty of disclosure applies only when a contract is entered into or renewed. However, as established by case law cited above, the duty of disclosure as specified under the Marine Insurance Act of 1906 in English law has been to continue the duty of good faith and therefore the duty of disclosure right up to the point of a claim. This is another aspect that ahs created confusion in the application of section 18, in addition to the kind of information that would be deemed to be material enough to justify vitiating the contract if it remains undisclosed, as opposed to that information which should be the subject of common knowledge or such that its non disclosure will not substantially affect the decision of the underwriter on whether or not to insure the party who is approaching it. Conclusions: On the basis of the above, it may be concluded that Section 18 of the Act is significant, especially in the context of marine insurance because of the element of good faith that is the prime basis of contracting between the parties. This is one aspect in which marine contracts for insurance differ from normal contracts, as a result of which breach of warranties are also actionable in voiding a contract of insurance. Existing case law as repeatedly established the importance of disclosure because it goes hand in hand with the duty of good faith. Moreover, Sections 18 and 19 also show that all relevant information must be disclosed and where an agent is used or information from an agent is relied upon, then all such information must be disclosed which the parties could conceivably have been expected to know. Therefore, the person/s seeking insurance must also not withhold information that could potentially affect their claim later on. However, as also evident from the discussion of case law above, there are some conflicting aspects in the application of section 18. The first is in the nature of the information that is required to be provided under the duty of disclosure. Moreover, such duty of disclosure is required from both the insurer as well as the insured and the Courts have laid out conflicting decisions on whether or not a dispute over a claim to vitiate a contract on grounds of non disclosure should stand. Insurers are expected to be aware of certain developments, especially in areas that are relevant to the risks of losses that they insure against. The crucial aspect in determining how actionable a failure to disclose however appears to be based upon whether or not the information withheld is material to the decision of the insurer. The materiality of a piece of information is determined upon the basis of how important it would be in affecting the decision of the insurer and altering his decision to take up or reject the risks involved in the insurance protection that is being sought. The case law discussed above appears to suggest that the duty of disclosure will be enforced where material facts are concerned. Such facts would be those that would affect the decision of the insurer and could possibly have changed his decision to accept the risk if it had been disclosed. Therefore, valuation of the hull for example would not be of such great significance, since an insurer would be expected to have access to and a fair idea of such valuation on his own. However, where certain facts relevant in a particular case – known only to the person/s seeking insurance are withheld, then they are likely to be considered material and could vitiate a claim if not disclosed. Therefore on this basis, the duty of disclosure would also extent to such information which an agent could be expected to know or predict by virtue of his position as an expert in marine insurance. Another confusing aspect as revealed by case law above is the question of duration of existence of the duty of disclosure. The American position has been that this duty exists when a contract is concluded and renewed, however English law holds the position that the duty of good faith continues, therefore by inference, the duty of disclosure must also continue. It may thus be concluded that despite Section 21 of the Act which appears to suggest that an insurer cannot back out of a contract once he has issued a slip signifying his agreement to cover the risks, it must be concluded that the duty of disclosure will be relevant throughout the existence of the policy up to the point claims are made. The case of Bonner and Others30 also concluded that the duty of disclosure would hold good whether the case was one of insurance, reinsurance or non proportional reinsurance, thereby reiterating the position in English law that the duty of good faith and disclosure cannot be eschewed at any point. Another important case that reiterates this position is the recent case of Dahoney and Others v New India Assurance Co Ltd and others.31 In this case, the failure of the assureds to disclose that they had been directors of companies that had gone into liquidation was deemed to constitute a withholding of material facts that should have been disclosed. Although the assureds had provided information in accordance with a form provided by the underwriters, nevertheless their failure to disclose material information was deemed to be a breach of the duty of good faith and as a result, the right of the insurers to vitiate the claim was upheld. This case again reiterates the importance of the duty of disclosure and this right to disclosure cannot be waived under any circumstances, especially where the information is such that only the person seeking insurance would be privy to it. While information of a general nature that may be gleaned by insurers from other sources could be contested if non disclosure is claimed as grounds for vitiating a contract, this will not hold good where material facts are concerned. Bibliography Books/Journal Articles: * Arnould Law of Marine Insurance, 16 [th] edn * Birds, J, 2004. “Birds’ Modern Insurance Law” Sweet and Maxwell. * Derrington, S, 2001. “Non disclosure and misrepresentation in contracts of marine insurance: a comparative overview and some proposals for unification.” Lloyds Maritime and Commercial Law Quarterly 66 * Chitty on contracts(1994) (27th edn) * Hodges, S, 1996. “Law of Marine Insurance” London: Cavendish Publishing Ltd Cases: * Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (1991) 2 WLR 1279 at 1294-1295 * Banque Financierie de la Cite SA v Westgate Insurance Co Ltd (1991) 2 AC 249 * Bates v Hewitt (1867) L.R. 2 Q.B. 595 * Bonner and Others v Cox and Others [2005] EWCA Civ 1512, [2006] 1 All ER (Comm) 565, [2006] 2 Lloyds Rep 152 * Brotherton v Barber (1816) 5 M & S 418 * Brotherton v Aseguradora Colseguros SA [2003] EWCA Civ 705, [2003] 2 All ER (Comm) 298, [2003] Lloyds Rep IR 746 * Dahoney and Others v New India Assurance Co Ltd and others.(2004) EWCA Civ 1705 * Irving v Manning (1847) 1 HLC 287 * Lean v Hall (1923) 16 LI L Rep 100 * Life Association of Scotland v Foster (1873) 11M 351 * Lishman v Northern Maritime Insurance Co (1875) LR 10 CP 179 * Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd and La reunion Europeene (The Star Sea) (2001) 1 Lloyd’s rep 389 (HL) * Noble v Kennaway (1780) 2 Doug 511 at 513 * North Star Shipping Ltd and Others v Sphere Drake Insurance plc and others 2005] EWHC 665 (Comm), 1996 FOLIO NO 644 * Pan Atlantic Insurance Co v Pine Top Insurance Co (1955) 1 AC 501 (HL). * Schoenbaum 29 J Mar L & Com 1, 32 (1998). * Simner v New India Assurance Co Ltd [1995] LRLR 240, 259 * The Borre (1923) 15 Lloyds Rep 173 at 176R * The Moonacre [1992] 2 Lloyds Rep 501 at 517 * The Star Sea [1997] 1 Lloyds Rep. 360 (CA); also see Carter v Boehm (1766) 3 Burr 1905. Read More