Good Faith and Insurance Contracts

Peter MacDonald Eggers and Sir Simon Picken

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CHAPTER 3 The nature of the duty of the utmost good faith

Good faith and a structured duty

3.01 Good faith is an important part of every contractual relationship. The burden imposed on the parties to be concerned with good faith will vary according to the nature of the contract, especially if the contract is one of uberrima fides. All contracts and consent will be vitiated in the event of fraud or misrepresentation. However, only contracts requiring the utmost good faith must be made and to a certain extent performed openly, fairly and honestly.1 3.02 Uberrima fides is a principle. The classification of this principle as one of law or as an implied term or incidence of contract will be discussed below.2 The fact remains that good faith has been recognised by the law and has received statutory backing, together with the further duty of reasonable disclosure. Section 17 of the Marine Insurance Act 1906, which reflected the common law, identified the general principle as follows: “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 be avoided by the other party.” The following sections (sections 18–20) of the Marine Insurance Act 1906 specified with more particularity the duty of pre-contractual disclosure that rests on the shoulders of the assured.3 With the passage of the Insurance Act 2015, under the amended section 17 of the 1906 Act, the contract of (marine) insurance remains a contract of the utmost good faith: section 17 now provides that “A contract of marine insurance is a contract based upon the utmost good faith.”4 It is assumed that this represents the law applicable to non-marine insurance. The duty of pre-contractual disclosure applicable to non-consumer assureds (now called the duty of fair presentation of the risk) provided for under the Insurance Act 2015 (sections 3–7) more or less adopts the same structure of specifying the particulars of the duty as its rests on the assured.5 3.03 The duty of good faith has found expression (in various forms regarding the presentation of the risk, claims, the performance of other obligations and remedies) in many policies, receiving direct contractual force and the explicit consent of the assured and

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insurer.6 The effect of such stipulations may be such as to reinforce the duty of good faith or to restrict it.7 3.04 There is a predominant principle of good faith and a number of “rules”8 that serve the principle by providing structure and a guide to the implementation of the principle. These rules may have exceeded their brief. Nevertheless, they are essential to allow for the application of the principle to the relations of insurer and assured. The rules have been most developed in respect of the assured’s duty to the insurer when placing the insurance. However, there are other rules, governed by the notion of the utmost good faith, which identify the obligations of the assured in other respects and the insurer’s duties. These latter duties have been ill-defined.9 The bounds of the obligations that are imposed by the notion of utmost good faith should be considered to be closed,10 as such obligations spring from an overarching duty to observe the utmost good faith.11 We shall consider the scope of each of the recognised duties, concentrating on the assured’s duty at placing. Nevertheless, all aspects of the duty of the utmost good faith must be considered having regard to:

1. the assured’s (and his broker’s) duty of disclosure at placing;
2. the assured’s duty in the presentation of claims;
3. the assured’s duty in connection with the other aspects of the insurance relationship, often after the contract is made;
4. the insurer’s duty, at all stages.

Each of these aspects will be considered in light of the common law principles enshrined in sections 17–20 of the Marine Insurance Act 1906 and, separately, in the provisions of the Insurance Act 2015. The Insurance Act 2015 however is likely to restrict any meaningful development of the duty of utmost good faith outside the non-consumer assured’s duty of fair presentation of the risk at placing. While the 2015 Act retains the concept of “utmost good faith” underpinning the contract of insurance,12 the general abolition of avoidance as a remedy for any failure to observe the utmost good faith in section 14(1) may mean that the duty of utmost good faith in so far as it exists outside the assured’s duty of fair presentation of the risk or, possibly, the duty not to present fraudulent claims, is abrogated. The alternative is that if the common law can find other remedies for a breach of the duty of utmost good faith in circumstances not addressed in the Insurance Act 2015, that duty may yet have some meaning. It is notable however that the Explanatory Notes published with the Insurance Act 2015 state, at paragraph 116, that “The intention of section 14 is that good faith will remain an interpretative principle, with section 17 of the 1906 Act and the

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common law continuing to provide that insurance contracts are contracts of good faith.” It is unclear what this means in the context of a general duty of utmost good faith, although the Law Commission suggested that it applied to explaining the scope of the duty of fair presentation, the interpretation of contractual terms, and dealing with hard cases.13

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