Good Faith and Insurance Contracts

Peter MacDonald Eggers and Sir Simon Picken

Document

Page 95

CHAPTER 4 The source of the duty of utmost good faith

4.01 There have been a number of attempts to delve into the mists of time and the well of authorities to divine the nature of the obligation to exercise good faith in the relations of insurer and assured. These attempts have been prompted by a search for the trove of remedies available for bad faith, the fierce debate about the duration of the duty, an explanation of the effect of an assignment of a policy upon the duty and a determination of the extent to which the duty can be trimmed or enlarged by express agreement between the parties. While the practical effects of the characterisation of good faith in insurance contracts have fallen for consideration before the courts, there have been many occasions when the courts have taken the opportunity, whilst examining the duty, to explain the basis of the duty.

The law merchant, the common law and insurance – an accelerated history

4.02 In Hodgson v Richardson,1 Yates J considered the vitiation of contracts by a failure to comply with the duty of disclosure to be based upon principles of “natural law”. In Pawson v Watson,2 Lord Mansfield held that all dealings, at least in the world of insurance, had to be fair and honest in accordance with the “law of merchants”. It was not until the late 19th century that the courts began to classify the duty as falling within the common law.3 4.03 Putting aside the incidence of natural law (although it should be noted that mercantile custom was treated as “the laws of nature”),4 the transformation of the duty of good faith from the law of merchants5 into the common law is consistent with the historical development of the commercial law.6 In the Middle Ages, the law merchant was applied by various courts in England to both domestic and foreign transactions7 in recognition of the practices and customs of international trade. The law merchant was a part of international

Page 96

law,8 in so far as it represented commercial and maritime practices that evolved in the trading centres of Europe, such as Florence, Palermo, Bruges, Oleron, Barcelona and London.9 4.04 Originally, the law merchant and the common law were separate bodies of laws.10 The common law sought to borrow rules from the law merchant in order to govern domestic trade. This process began as early as the reign of Edward I11 and was completed by the end of the 16th century.12 However, international trade continued to be regulated by the law merchant. In the 17th century, English law developed codes, structures and rules to govern impositions, monopolies, and foreign trade. In order to administer such laws, the common law courts and the Courts of Chancery were compelled to integrate the law merchant with such public laws.13 4.05 The common law applied the rules of the law merchant in a piecemeal fashion, without consistency and without a co-ordinated overview to ensure the implementation of a body of commercial law. Further, some rules of the law merchant were also applied in equity. It was not until Holt CJ entered the scene that an attempt was made to give force to the customs of merchants and the law merchant that embodied those customs in a structured set of principles.14 This process was accelerated and completed by Lord Mansfield CJ in the late 18th century,15 when the law merchant was subsumed fully by the common law.16

Page 97

At this time, the law merchant ceased to be a distinct body of law and where the practices of merchants and traders were proved before the courts of law, they were settled as part of the common law.17 The answers to all commercial problems were not just known to the law merchant, but could also be found in the common law, notably the principle of caveat emptor, which was unknown to the law merchant.18 4.06 Indeed, Lord Mansfield was sufficiently keen to apply the practices of the trade that he presided over trials at Guildhall together with a jury of merchants of the City of London. His Lordship’s endeavours were not limited to the courtroom but extended to discussing commercial matters with men of business19 as well as inviting them to dine with him at his home in Bloomsbury Square.20 In this way, Lord Mansfield became the founder of English commercial law21 and, in particular, insurance law.22 4.07 The law merchant developed in Europe with respect to the various aspects of international trade and shipping, not least insurance. The oldest records of insurance contracts have been found in the archives of Genoa, Palermo and Florence,23 where they were treated as incidents of transport and identified with risks in sale or loan contracts, particularly as regards carriage by sea. The first policies were fashioned on the basis of sale or bottomry contracts, because the first insurers were also the owners of the ships that carried the goods in question. At this time, the rules of insurable interest and subrogation were developed as part of the law of merchants.24 Subsequently, professional insurers began to offer their services and the insurance contracts took their own form. The earliest legislation governing insurance was passed in Genoa and Florence. Shipments between Italy and Antwerp and Bruges were undertaken at this time. This led to the emergence of an underwriting market in these cities by the 15th century.25 The first extensive code was established by the statutes of Barcelona from 1435 to 1484.26 This code developed the major principles of insurance law.27 4.08 The first record of a policy in England is contained in the report of the decision in Broke v Maynard,28 which demonstrates that insurance was commonly encountered in

Page 98

England at that time.29 At this time, it was considered that insurance was not based on the common law, but rather civil and maritime laws.30 While policies of insurance originated in Italy, by the 16th century insurance policies were very much in vogue in England. From the 14th to 16th centuries, trade between the Italian city states and England led to the development of insurance business in England, often undertaken by Italian merchants resident in London (such as Lombard Street).31 Indeed, by the 1540s, most insurance contracts written in London were in the Italian language; thereafter, they were written in English, reflecting the probable nationality of the underwriters.32 Policies were regularly issued with a clause to the effect that the policy shall be as much in force and effect as the “surest writing or policy heretofore made in Lombard Street”.33 In this way, it was intended by the insurer and assured that their practices and customs would govern the relationship created by the policy.34 The insurance policy achieved its well-known and standard from by 1570s.35 4.09 In the 16th and 17th centuries, there were a number of tribunals established. In 1577, the City of London established a court to deal with insurance disputes, which was manned by merchants and, it appears, lawyers.36 In 1601, Parliament passed a statute providing for the determination of disputes relating to policies of assurance, by a commission comprising merchants and lawyers.37 The practice of assurance was attested to by that statute (43 Eliz c. 12), providing that by means of policies of insurance

it cometh to pass upon the loss or perishing of any ship, there followeth not the undoing of any man, but the loss lighteth rather easily upon many than heavily upon few, and rather upon them that adventure not than those that do adventure, whereby all merchants, especially of the younger sort, are allured to venture more willingly and more freely.38

The rest of this document is only available to i-law.com online subscribers.

If you are already a subscriber, click Log In button.