Good Faith and Insurance Contracts

Peter MacDonald Eggers and Sir Simon Picken

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CHAPTER 12 The insurer’s duty

Introduction

12.01 Mutuality or the common obligation owed by both parties to the contract of insurance is a trade mark of the common law duty of good faith applicable to insurance contracts.1 Much of the jurisprudence developed by the courts over the years which have marked the development of the duty has been concerned principally with the position of the assured in bearing the full weight of the obligation to observe good faith in his dealings with the insurer, chiefly because the assured knows much more about the insured risk than the insurer. At common law, the position of the insurer remained somewhat vague. It is clear that, at common law, the insurer owes the assured a duty to act in good faith;2 it is also plain that the insurer is obliged to disclose material information to the assured before and when the contract is made. However, the test of materiality is not altogether clear and the scope of the duty in other circumstances has barely been tested. This chapter proposes to analyse this duty of good faith as it falls upon the insurer and suggest how the parties may respond to factual scenarios that may occasion the observance of good faith. 12.02 The passage of the Insurance Act 2015 has accentuated the problems associated with the insurer’s duty of good faith. In this respect, it is worth noting the changes to the law effected by the 2015 Act. First, section 14(1) of the 2015 Act provides that “Any rule of law permitting a party to a contract of insurance to avoid the contract on the ground that the utmost good faith has not been observed by the other party is abolished.” This amendment seeks to remove avoidance of the insurance contract as the universal remedy for any breach of the duty of utmost good faith. In so doing, it explicitly recognises that the duty of utmost good faith is a reciprocal duty owed both by the assured and the insurer. Second, section 14(2) provides that “Any rule of law to the effect that a contract of insurance is a contract based on the utmost good faith” is modified by the Consumer Insurance (Disclosure and Representations) Act 2012 and the Insurance Act 2015. Third, section 14(3) amends section 17 of the Marine Insurance Act 1906 so that it now provides that “A contract of marine insurance is a contract based upon the utmost good faith.” The reference to avoidance as the universal remedy for breach of the duty is removed in accordance with section 14(1). The heading of section 17-“Insurance is uberrimae fidei”-remains. In so doing, it does not appear that the intention was to render the duty of utmost

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good faith as no longer binding on the insurer.3 Indeed, the Explanatory Notes accompanying the Insurance Act 2015 provide that “The intention of section 14 is that good faith will remain an interpretative principle, with section 17 of the 1906 Act and the common law continuing to provide that insurance contracts are contracts of good faith.” The Law Commission suggested that this means that good faith is a principle by which (a) the duty of fair presentation is interpreted; (b) other obligations in the insurance contract should be interpreted; (c) the need to imply contractual duties is interpreted; and (d) room should be left for judicial flexibility.4 In this last context, the Law Commission suggested that the principle of good faith as it applied to the insurer – thus recognising its mutuality – could restrain hard cases:

“It is possible that the principle of a mutual duty of good faith could provide a solution to an especially hard case or emergent difficulty. Although we think such cases would be extremely rare, it is possible that the courts could develop the concept to prevent an insurer from relying on a right to deny a claim where it would be manifestly unfair to do so.”

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