Good Faith and Insurance Contracts

Peter MacDonald Eggers and Sir Simon Picken

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CHAPTER 11 The assured’s duty of utmost good faith and claims

11.01 The obligation of utmost good faith in respect of insurance contracts requires a higher standard of behaviour from the parties than is the case with other types of contract. It is not enough, when the parties are negotiating towards the insurance contract, for the assured to refrain from actively deceiving the insurer. At the pre-contractual stage, the non-consumer assured is subject to a positive duty1 to disclose circumstances material to the risk, which may result in the insurer declining the risk or imposing additional and more onerous terms than those originally proposed. The insurer is of course subject to a reciprocal duty, albeit that duty may be of limited significance by reason of the reforms introduced by the Insurance Act 2015. That said, by reason of section 13A of the Insurance Act 2015, the insurance contract is subject to an implied term that the insurer will pay claims within a reasonable time, the breach of which term may expose the insurer to a claim for damages by the assured. 11.02 In the preceding chapter, we observed that the duty of utmost good faith does not cease to exist with the conclusion of the insurance contract.2 However, the post-contractual duty does not require the same high, some would say onerous, standards as are imposed on non-consumer assureds during the negotiations towards the contract. After the insurance contract has been concluded, the higher duty of fair presentation of the risk (including the duty of disclosure) will revive if and when the parties seek to agree upon a modification to their respective rights and obligations by way of a contractual variation or amendment (as is recognised by the Insurance Act 2015). Otherwise, the duty of utmost good faith is one that requires no more than that the parties abstain from fraud in their post-contractual dealings. In one sense, this may be no different to the position of any other party to any other contract. Given that the parties are parties to an insurance contract, a contract uberrimae fidei, the difference lies, at least potentially, in the parties’ remedies for a breach of this duty. Those remedies however have been questioned at common law and have been reformed by section 12 of the Insurance Act 2015. 11.03 In this chapter, we examine the application of the duty of utmost good faith to the assured’s presentation of a claim under the insurance contract, both at common law and under the Insurance Act 2015 (which applies to contracts of insurance and variations

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to insurance contracts concluded on or after 12 August 2016). The presentation of a claim does not require the insurer to exercise underwriting judgment, in the sense of evaluating the risk or defining the terms of cover or fixing an appropriate level of premium. Indeed, in the majority of cases, the person considering the claim will not be the person who wrote the risk since most insurers have separate underwriting and claims departments. When presented with a claim, the insurer has to exercise a different kind of judgment. He is being called upon to fulfil his side of the bargain (a bargain reached following the insurer’s underwriting decision to underwrite the risk) and to meet the assured’s claim. The insurer is being asked to evaluate the facts underlying the claim as presented by the assured and then to determine whether or not he is bound to indemnify the assured in respect of his claim. 11.04 Once a claim is presented, the insurer may pay or decline the claim immediately. This will only happen in the most straightforward of cases. Usually, the insurer will have to consider what further information he requires from the assured and what independent investigations he should make, including whether to retain loss adjusters, surveyors or lawyers. These decisions will be taken based on the information provided by the assured who, at least initially, will know much more about the circumstances of the loss than the insurer. In some cases, the insurer will decide to undertake his own investigations into the loss.3 11.05 The assured is often put in a position where the temptation to make a knowingly false statement becomes too great. This temptation exists against a public perception that insurance companies are “fair game”.4 It is against this background that the nature of the duty of utmost good faith must be examined. 11.06 The relationship between the duty of utmost good faith and claims has become an increasingly important issue in recent years, with those involved in advising assureds and insurers alike focusing as perhaps never before upon the quality and accuracy of information and documentation provided to the insurer in support of a claim. Since the first edition of this book, the assured’s duty of utmost good faith at common law as it applies to claims has undergone profound change and analysis culminating in the decision of the Supreme Court in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG.5 The scope of the assured’s duty in his presentation of a claim has been clarified: it is clear that the assured’s obligation in presenting a claim is no wider than a duty not to present a fraudulent claim. The duration of the duty of utmost good faith has been considered and resolved: it appears that the Court of Appeal and Supreme Court accept that the duty of utmost good faith continues beyond the making of the contract of insurance and, at all stages, requires the parties to abstain from fraudulent conduct. 11.07 However, uncertainty remains.6 There are two questions for which the courts have failed to provide a definitive answer. First, is the assured’s duty not to present a fraudulent

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claim within the folds of the duty of utmost good faith? Secondly, what is the consequence of the presentation of a fraudulent claim and what remedies are available to the insurer in the event of a fraudulent claim? This second question depends on the answer to the first question. However, the second question has been answered and clarified by section 12 of the Insurance Act 2015. The striking feature of these uncertainties is that until the House of Lords’ judgment in Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd; The Star Sea,7 it appeared to be accepted that the duty of utmost good faith required the assured not to present a fraudulent claim.8 However, the House of Lords appeared to be profoundly unhappy at the development that the duty of utmost good faith (carrying with it the remedy of avoidance in respect of any breach) embraced the presentation of claims.9 11.08 The matter of remedies at common law was, and remains, less clear, given that the perceived wisdom was that in the event of a fraudulent claim, there was a breach of the duty of utmost good faith and, thus, pursuant to section 17 of the Marine Insurance Act 1906, the innocent party was entitled to avoid the contract. Nevertheless, as recognised by the Court of Appeal in Orakpo v Barclays Insurance Services,10 it was previously assumed that one of the consequences of a fraudulent claim was that the assured forfeited all benefit under the policy. The notion of forfeiture, as will be discussed, is one that is now lacking in any clear definition, although it appears that the forfeiture extends only to the insurance claim tainted by fraud and potentially prospective benefit under the policy. As it turns out, section 12 of the Insurance Act 2015 achieves a similar position, albeit in a different way. 11.09 It is the penal quality of the remedy of avoidance which has done so much to raise these uncertainties.11 In Versloot Dredging BV v HDI Gerling Industrie Versicherung AG,12 Lord Sumption said in this respect:

“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. The principle was given statutory force by section 17 of the Marine Insurance Act 1906. In Britton, 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 ([2015] 1 Lloyd’s Rep 32, paras 76 and 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 in The Star Sea (paras 50, 61 and 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. On that view of the matter, the fraudulent claims rule must be regarded as a term implied or inferred by law, or at any rate an incident of the contract. The correct categorisation matters only because if it is a manifestation of the duty of utmost good faith, then the effect of section 17 of the Marine Insurance Act 1906 is that the whole contract is voidable ab initio upon a breach, and not just the fraudulent claim. If, on the other hand, one adheres to the contractual analysis, the right to avoid the contract for breach of the duty must depend on the principles governing the

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repudiation of contracts, and avoidance would operate prospectively only. The choice is not, however, before us on this appeal because the insurers do not seek to avoid the contract. They seek only to avoid the claim for this particular casualty.”

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