Good Faith and Insurance Contracts

Peter MacDonald Eggers and Sir Simon Picken

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CHAPTER 10 The post-contractual duty of good faith

10.01 Despite suggestions to the contrary,1 it was reasonably settled at common law that the duty of utmost good faith continues to apply beyond the making of the insurance contract and throughout the relationship between the parties governed by that contract.2 That this is so is apparent from the fact that Willes J in Britton v Royal Insurance Company held that the assured was obliged to exercise the “perfect good faith” in the presentation of a claim under the policy.3 Yet this continuity of the duty during the contractual relationship is not made obvious in the statutory embodiment of this common law duty in section 17 of the Marine Insurance Act 1906. That section provides: “A contract of marine insurance is a contract based on 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.” Sections 18–20 of the Act4 impose specific obligations on the assured and its agents to disclose all material circumstances and to refrain from misrepresentation during negotiations leading up to and including the conclusion of the insurance contract. In Versloot Dredging BV v HDI Gerling Industrie Versicherung AG,5 Lord Sumption said that:

“It was settled from an early stage of the history of English insurance law that the duty of utmost good faith applied not only in the making of the contract but in the course of its performance.

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The principle was given statutory force by section 17 of the Marine Insurance Act. In Britton’s case, Willes J regarded the fraudulent claims rule as a manifestation of the duty of utmost good faith, a view adopted by Christopher Clarke LJ, delivering the leading judgment in the Court of Appeal in the present case: paras 76–77. The rule is peculiar to contracts of insurance, and there can be little doubt that historically it is because they are contracts of utmost good faith that they have this unique characteristic. But I am inclined to agree with the view expressed by Lord Hobhouse of Woodborough in The Star Sea (paras 50, 61–62) that once the contract is made, the content of the duty of good faith and the consequences of its breach must be accommodated within the general principles of the law of contract.”

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