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Of reciprocity and remedies—duty of disclosure in insurance contracts

Published online by Cambridge University Press:  02 January 2018

H. Y. Yeo
H. Y. Yeo*
Affiliation:
National University of Singapore
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Extract

One of the most distinguishing features of an insurance contract (being a contract uberrimae fidei) is that it attracts the duty of disclosure. As it presently stands, this duty unfortunately has drawn such criticism from many quarters for inflicting what is arguably one of the most onerous burdens upon the insured. The irony of the situation is that the original intention of the doctrine, as had been expressed by Lord Mansfield himself in the celebrated eighteenth century case of Carter v Boehm, was for both contractual parties–and not just only the insured–to exercise the utmost good faith in their dealings. However, all through the intervening years, the tide had almost entirely flowed in one direction. There has, hitherto, not really been any case law developing, or even spelling out, the insurer's duty of good faith. On the contrary, landmark cases such as CTI v Oceanus and Lambert v CIS have been only too generous in showering the insurer with so many privileges that from the perspective of the hapless insured the duty becomes almost like ‘an engine of oppression’.

Type
Research Article
Information
Legal Studies , Volume 11 , Issue 2 , July 1991 , pp. 131 - 154
Copyright
Copyright © Society of Legal Scholars 1991

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References

1. The insurance contract is about the most prominent example of a contract of utmost good faith. Others include contracts of partnership, certain family settlement contracts, contracts to take shares in new companies, and possibly suretyship. See also March Cabaret Club & Casino Ltd v London Assurance [1975] 1 Lloyd's Rep 169 at 175.

2. (1766) 3 Burr 1905; 97 ER 1162.

3. This may be understandably so as in the nature of things more often than not it would be the insured who is more apprised of superior knowledge. However, in the light of our subsequent discussion, it is hoped that the tide may possibly change. See infra, heading IV of main text.

4. [1984] 1 Lloyd's Rep 476.

5. [1975] 2 Lloyd's Rep 485.

6. Literature critical of this duty of disclosure is legion. See for example Harnett, ‘A Remnant in the Law of Insurance’ (1950) 15 Law & Contemp Prob 391; Hasson, ‘Uberrima Fides in Insurance Law-A Critical Evaluation’ (1969) 32 Mod Law Rev 617; notes in (1976) 39 Mod Law Rev 487 and (1977) 40 Mod Law Rev 79; Birds, ‘The Reform of Insurance Law’ [19821 Journal of Business Law 449; Hasson, ‘Good Faith in Contract Law — Some Lessons from Insurance Law’, 13 Can Bus LJ 93 at 94—100. See also the English Law Commission Report No 104 (1980) Cmnd 8064, paras 3.17—3.22; and in Australia, The Law Reform Commission Report No 20, paras 172, 175 and 183.

7. [1990] 2 All ER 947, HL; [1988] 2 Lloyd's Rep 513, CA. See also the first instance decision, Banque Kyser Ullman SA v Skandia (UK) Ins Co Ltd [1987] 1 Lloyd's Rep 69, HCt. The appeals were originally lodged by the two insurers, Hodge and Skandia, against four respondent banks. However, during the course of hearing before the appellate court, Skandia withdrew its appeal and the other banks assigned their claims to Banque Financiere (formerly named Banque Keyser Ullman SA). As such, Hodge (renamed Westgate) and Banque Financiere were left as the appellant and respondent, respectively.

8. Ibid.

9. Although other issues of tort and contract were raised by the case, they lie outside the scope of this article.

10. Supra, note 7. See also the author's earlier comments on the first-instance decision: Yeo, ‘Uberrima Fides— Reprocity. of Duty in Insurance Contracts’ (1988) 2 Review of International Business Law 271.

11. See first-instance decision, supra, note 7 at 92, HCt.

12. Supra, note 2, at 1910 (Burr) and at 1164 (ER).

13. 1906 (6 Edw 7), c 41.

14. Lambert v CIS, supra, note 5; Highlands Ins Co v Continental Ins Co [1987] I Lloyd's Rep 109.

15. CTI v Oceanus, supra, note 4 at 496; Re Bradley and Essex and Suffolk Accident Indemnity Society [1912] 1 KB 415 at 430, CA; Goldschlager v Royal IN Co (1977) 84 DLR (3d) 355 at 365, Ont HCt. MacGillivray B Parkington on Insurance Law, 7th edn, para 524; Amould's Law of Marine Insurance and Average, 16th edn, paras 579 and 627; Colinvaux, The Law of Insurance, 5th edn, at 92; Birds, Modem Insurance Law, at 83. (The earlier editions of MacGillivray, Colinvaux and Birds are referred to as they were the editions in existence at the time of hearing of the first-instance decision of the Skandia case.)

16. See, for example, Bowler v Fidelity & Casualty Co of New York 53 NJ 313, 250 A 2d 580 (1969); Gruenberg v Actna Ins Co 510 P 2d 1032(1973); Fletcher v Western National Lift Ins Co 10 Cal App 3d 376 (1970); Silbergu Calijomia Lift Ins Co 521 P 2d 1103 (1974), where the duty of good faith was imposed upon the insurer. See also Keeton and Widiss, Insurance Law, §6.2–6.3.

17. Per Slade LJ, supra, note 7 at 544, CA.

18. Per Lord Bridge, supra, note 7 at 950, HL.

19. Supra, note 2 (ER) at 1164.

20. Supra, note 7 (HCt) at 94.

21. Ibid.

22. See Uniform Commercial Code, §1—201(19); cases cited in Uniform Laws Annotated, Vol 1, Uniform Commercial Code 1987, Cumulative Annual Pocket Part, at 30-33; Bender's Uniform Commercial Code Service, Vol 3, Sales and Bulk Transfers under the Uniform Commercial Code (Duesenberg and King) 1986, at 4-225 to 4-241. See also Hillman, Mcdonnell and Nickleson, Common Law and Equity under the Uniform Commercial Code 1985, paras 6.29-32.

23. Supra, note 7 at 545, CA. See especially the judgment of Lord Bridge, supra, note 7 at 950, HL. See also infra, discussion in main text under sub-heading III(d).

24. The clause in question reads as follows: ‘The insurers shall not be liable hereunder for any claim or claims arising directly or indirectly by fraud, attempted fraud, misdescription or deception by any person, firm, organisation or company…’ The issue of the construction of the clause was not raised in both lower courts.

25. Save for some dicta which it is suggested generally support the Court of Appeal's articulation. See supra, note 23.

26. In the obverse case where the duty is thrust upon the insured, whether the insured ought to disclose matters within his constructive knowledge remains unclear in general insurance (unlike marine insurance —s 18(1), Marine Insurance Act). In life insurance, it has been argued that this doctrine of constructive knowledge is inapplicable for ‘you cannot disclose what you do not know’, per Fletcher Moulton LJ in Joel v Law Union & Crown Ins Co [1908] 2 KB 863 at 884. See also Australia and New Zealand Bank v Colonial Eagle Wharves [1960] 2 Lloyd's Rep 241 at 251—252 where McNair J left this question open. However, in the present instance where it is the insurer (often a large corporate enterprise) who is assuming the duty, the policy reasons which pointed against the imputation of such knowledge especially to a private individual assured are absent. The better approach would be to apply this doctrine when it is the insurer who is discharging the re-vitalised duty.

27. Supra, note 10 at 277–280. See also clarke, ‘Failure to Disclose and Failure to Legislate: Is it Material?-I’ [1988] Journal of Business Law 206.

28. Supra, note 4. It may perhaps be unfortunate that in the present Wedgate case the ‘impact approach’ has been again resoundingly reiterated by the Court of Appeal. For literature critical of this approach, see Brooke, ‘Materiality in Insurance Contracts’ (1985) Lloyd's Maritime and Commercial Law Quarterly 437; and Clarke, ‘Failure to Disclose and Failure to Legislate: Is it Material?-11’ [1988] Journal of Business Law 298; in which both authors suggested that the Court of Appeal in CTI v Oceanus had misconstrued earlier precedents on the question of materiality. See also Diamond, ‘The Law of Marine Insurance-has it a Future?’ (1986) Lloyd's Maritime and Commercial Law Quarterly 25. The Oceanus approach has been specifically disapproved by the Australian Court of Appeal of New South Wales in Barclay Holdings (Australia) Pte Ltd v British National Ins Co (1987) 8 NSWLR 514. See Yeo, ‘Common Law Materiality-an Australian Alternative’ [1990] Journal of Business Law 97. However, for a view that seems to favour the Oceanus approach, see Khan, ‘A New Test for Materiality in Insurance Law’ [1986] Journal of Business Law 37.

29. Because of the remoteness rule, the loss must be within the reasonable contemplation of the parties as the probable result of the breach. In the absence of this causal or nexus connection, there cannot be the ‘serious possibility’ or ‘real danger’ of any necessary flow of damages from the breach and the loss must be considered too remote. See Koufos v Czarnikow Ltd [1969] 1 AC 350 at 417 and 425, respectively.

30. [1973] 2 Lloyd's Rep 442 at 463. It ought to be noted that Kirby P in the New South Wales Supreme Court preferred Kerr LJ's earlier stance for ‘first thoughts are often the best in judicial life as any other’, supra, note 28.

31. Black King Shipping Corpn and Wayang (Panama) SA v Mark Ronald Massie (The Litsion Pride) [1985] l Lloyd's Rep, 437.

30. See the remarks of Scrutton LJ and Viscount Dunedin in Glicksman v Lamushire & General Assurance [1925] KB 593 at 609 and [1927] AC 139 at 143–144, respectively.

33. The appellate judges merely acknowledged that it might well be that on the particular facts of some cases (though by no means necessarily all) the duty of post-contractual disclosure could be said to arise under the terms of a preceding contract. They were thus not prepared to commit themselves.

34. Naturally, the assumption is that ss 17 and 18(1) are reflective of the common law position in general insurance. See supra, note 14.

35. Some of the issues in The Litsion Pride were also alluded to but unfortunately not really dealt with by the appellate court in The Bank of Nova Scotia v Hellenic Mutual War Risk Associates Ltd (The Good Luck) [1989] 2 Lloyd's Rep 238.

36. Ibid. For first-instance decision, see [1988] 1 Lloyd's Rep 514. See also comment by Muchlinski, ‘The Insurer's Duties of Good Faith and Disclosure’ [1988] LMCLQ 27.

37. It can however be suggested that Lord Jauncey's definition is of less help to the insured who though concerned about risk is even more anxious about recoverability once he has made a decision to proceed with the insurance cover. In fact, for the two examples cited, one need not resort to non-disclosure to avoid the contract in order to retrieve the premiums; the non-existence of the subject matter would already have provided a sufficient ground for the insured to recover his premium contributions in respect of total failure of consideration in quasi-contract.

38. They are merely different ways of spelling out what is essentially the same ambit, ie matters relevant to risk and recoverability.

39. These various categories are well documented in standard textbooks, eg MacGillivray & Parkington on Insurance Law, 8th edn, paras 669–691; Birds, , Modern Insurance Law, 2nd edn, at 89–93 Google Scholar; Ivamy, , General Principles of Insurance Law, 5th edn, at 131–136 Google Scholar.

40. [1970] 1 Lloyd's Rep 313.

41. Per Slesser LJ [1936] 1 KB 408 at 414. This was the moral hazard rationale furnished for insisting on disclosure in respect of previous rejection of risks. In the United States, in respect of first-party claims there have been instances where the insurer unreasonably refuses to pay, uses obstructive tactics to delay payment, fails to act promptly in the investigation and processing of claims, uses threatening communication, forces the insured either to surrender his policy or disadvantageously settle a non-existent dispute, or fails to provide reasonable explanations for denial of claims. See the American cases in supra, note 16. Literature on this subject is rife. See, for instance, Holmes, ‘Is there Life after Gilmore's Death of Contract?— Inductions from a Study of Commercial Good Faith in First-Party Insurance Contracts’ (1980) 65 Cor LQ 336. See also note, ‘Reconstructing Breach of the Implied Covenant of Good Faith and Fair Dealing as a Tort’ (1985) 73 Cal L Rev 1291. These examples all patently evince mala fides on the part of the insurer and have been held in certain American jurisdictions to amount to a breach of the insurer's implied-in-law duty of good faith and fair dealing — that it will do nothing to deprive the insured of his policy benefits. See also Keeton and Widiss, supra, note 16. In view of the Westgate reiteration of the insurer's duty of good faith, these American instances may be very apposite. However the practical difficulty on the English scene lies in the remedy to be granted. In America, the breaches can sound in contract and attract damages. On top of that, they may also sound in tort such that extra-contractual damages like economic consequential damages and mental distress damages may also be awarded and in appropriate cases where the insured's conduct has been found to be deliberately oppressive and malicious, punitive damages may also be granted. The appellate court in the Westgate case must appear comparatively conservative or even timorous in that English law does not recognise the breach of duty to sound in either contract or tort and as such no damages are to be granted. See infra, discussion in main text under heading V. For this reason, the sole English remedy of avoidance might render what would otherwise be rather exciting potential heads of liability ineffective as avoidance would more often than not be highly inadequate, especially where a loss has already occurred.

42. As regards the filling of proposal forms, there are many cases in which agents have misstated answers (and possibly deliberately so in order to conclude contracts and earn commissions). After a period, it must surely be obvious to the insurance company who such ‘black sheep’ may be. Arguably, there may lie in the insurer a duty to warn the unsuspecting potential insured that the agent lacks the authority to represent the insurance company in terms of filling in proposal forms. For cases involving misstatements penned by insurance agents, see Bawden v London, Edinburgh & Glasgow Assurance Co [1982] 2 QB 534; Newsholme Bros v Road Transport & General Ins Co [1929] 2 KB 356; Stone v Reliance Mutual Ins Society Ltd [1972] 1 Lloyd's Rep 469.

43. As raised by Birds in his note [1986] Journal of Business Law 439.

44. Per Stephenson LJ in CTI v Oceanus, supra, note 4 at 529.

45. Surpa, note 41.

46. [1924] AC 836. Naturally, the insurer may try to argue that these are matters of law rather than fact. As such, the insured ought to seek the advice of his own counsel. Furthermore, see Re Hooley Rubber & Chemical Man Co [1920] 1 KB 257, where those representations which are considered to be of law generally do not bind the insurer when miscommunicated by the insurer's agents. For a comparison, see the New Jersey Supreme Court's case of Bowler v Fidelity & Casualty Go of New York, supra, note 16 at 587–588, which is highly instructive of how the American courts view the doctrine of good faith: ‘Insurance policies are contracts of utmost good faith and must be administered and performed as such by the insurer. Good faith “demands that the insurer deal with laymen as laymen and not as experts in the subtleties of law and underwriting”…., In all insurance contracts, particularly where the language expressing the extent of the coverage may be deceptive to the ordinary layman, there is an implied covenant of good faith and fair dealing that the insurer will not do anything to injure the right of its policy holder to receive the benefits of his contract.’ See also Keeton and Widiss, supra, note 16.

47. Eg, in Kumar v Life Ins Corpn Of India [1974] 1 Lloyd's Rep 147, the assured did not realise that the caeserian section was more than mere delivery of baby simpliciter and was in fact to be considered an operation.

48. This was the scenario in the Canadian case of Pense v The Life Assurance Co (1907) 15 OLR 131, CA, affd 42 SCR 246. Hasson has argued that there should have been a duty on the part of the insurer to co-operate with the insured to explain the insured's options under the policy; see ‘Good Faith in Contract Law — Some Lessons from Insurance Law’, 92 Canadian Business Law Journal 93 at 106.

49. Joel v Law Union & Crown Ins Co, supra, note 26; Locker & Woolf Ltd v Western Australia Ins Co, supra, note 41 at 415; Cornhill Ins Co v Assenheim (1937) 58 LLR 27 at 31.

50. Supra, note 7 at 96, HCt.

51. Supra, note 7 at 951, HL. For non-subscribers to the appellate court's view, hope may yet glimmer for a possible conclusive reclarification of the matter should an opportunity eventually present itself at the House of Lords.

52. They merely concurred with the other three Law Lords.

53. The judge merely concluded that the principle was based on rules developed by judges (and not an implied term) without really discussing the divergent cases on this point. See the following discussion in main text and see also infra, note 58.

54. See Meagher, Gummow and Lehane, Equip, Doctrines and Rmudics, 2nd edn, para 2301.

55. Supra, note 7 at 107, HCt.

56. There has been a suggestion that perhaps the duty arose out of the fiduciary relationship between the insurer and the insured. See Mathews, ‘Uberrima Fides in Modern Insurance Law’, New Foundations for Insurance Law 39. See also a discussion on this area by Davidson, ‘Insurance — Duty of Disclosure and Duty of Care’ [1988] Scots Law Times 73.

57. Supra, note 7 at 547, CA.

58. For cases which suggest that it arises outside the contract and is not an implied term, see the present Westgale case; Merchants & Manufacturers Ins Co v Hunt [1941] 1 KB 215 at 313; March Cabaret v London Assurance [1975] I Lloyd's Rep 437 at 518-519; Bank af Nova Scotia v Hellenic Mutual War Risk Associates, supra, note 35. The main protagonists of the other school (that it is based on an implied duty) include Moens v Heyworth (1842) 10 M & W 147 at 157; Pickersgill (William) & Sons Ltd v London & Provincial Marine & General Ins Co Ltd [1912] 3 KB 614; and Black King Shipping Corpn and Wqang (Panama) SA v Mark Ronald Massie (The Litsion Pride), supra, note 31. See also supra, note 56.

59. (1886) I7 QBD 553 at 562, CA. Compare Lord Watson's dictum in [1887] 12 App Cas 531 at 539, which was additionally relied upon. On the other hand, see Pickersgill v London & Provincial, ibid, where Hamilton J also relied on Lord Watson's dictum to conclude otherwise (ie implied term of contract). See also Hirst J, supra, note 31, who in fact relied on the majority judges in Blackburn Low v Vigors (viz Lopes and Lindley LJJ) and concluded that it was an implied term.

60. The appellate court relied on the editors' treatment of a condition precedent in Chitty on Contracts, 25th edn, paras 752–753.

61. Duer, 2 Insurance.

62. See infra, sub-heading V(e) of main text.

63. Supra, note 58 at 313.

64. Supra, note 60.

65. Ibid. Chitty on Contracts has suggested that non-compliance with the contingent condition precedent may lead to three possible scenarios: (i) suspension of rights and obligations of both parties; (ii) unilateral binding obligation of one party but with no binding bilateral obligation until the condition is fulfilled; and (iii) both parties entering into an immediate obligation but subject to a condition which suspends all or some of the obligations pending fulfilment of the condition. The textbook finally suggests that these three instances of a condition precedent are nevertheless contingent and will not render either liable on the contract in the event of non-fulfilment.

66. See also Lord Atkinson in New Zealand Shipping v Societe des Ateliers el Chentiers de France [1919] AC I at 9: ‘The party, who by his own act or omission brings that event about, cannot be permitted either to insist upon the stipulation himself or to compel the other party who is blameless to insist upon it, because to permit the blameable party to do either would be to permit him to take advantage of his own wrong.’

67. Treitel, The Law of Contract, 7th edn, at 50-57.

68. As will subsequently be discussed, one policy reason against awarding damages is the difficulty of measurement: see sub-heading V(d) of main text. To insist on damages for such a subsidiary obligation will cause one to confront the problem headlong again.

69. See supra, notes 31 and 32.

70. As such, the appellate court had to adumbrate its own materiality yardstick when the duty of disclosure was to be imposed upon the insurer. See earlier discussion, supra, heading III of main text.

71. Supra, note 31.

72. The Court of Appeal tried to distinguish The Litsion Pride on the basis that the case was based on the old practice of reliance on shipspaper; this the author submits is untenable as Hirst J himself (the presiding judge of The Litsion Pride) has specifically insisted that the ambit of the case stretched beyond the mere case of the shipspaper.

73. See main text at note 62. See also discussion in infra, sub-heading V(e) of main text.

74. The proportionality principle was modelled on French law; ie ‘the insurer shall be liable to provide only such cover as is in accordance with the ratio between the premium paid and the premium that the policy holder should have paid if he had declared the risk correctly.’ It was advanced to eliminate the ‘all-or-nothing’ result in English Law and was considered and rejected by the English Law Commission (Report no 104, 1980, Cmnd 8064, paras 4.4–4.9). See also the criticisms levied by the Australian Law Reform Commission (Report No 20, Insurance Contracts, paras 187—190).

75. This is to allow recovery to the extent that the notional undisclosed fact caused or contributed to the loss. The innate problems that are to be expected are well documented by the English Law Commission (ibid, paras 4.89–4.96). See also the Australian Law Commission's views (ibid, paras 191–193).

76. Ibid.

77. See supra, note 29.

78. For the remedy of avoidance, there would be no need to consider the mind of the particular insured whereas for damages the effect on the particular insured's mind may have to be investigated. See ibid.

79. Supra, note 7 at 550, CA.

80. Although the doctrine was based upon the equitable notion of good conscience. See Brown and Menzies, Insurance Law in Canada, at 21–22.

81. Burdick, ‘Contributions of the Law Merchant to the Common Law’, in Select Essays in Anglo-American Legal History, III, at 47.

82. Ibid, at 50.

83. See Brown and Menzies, supra, note 80. It ought to be noted that in contrast one particular textbook did cursorily attribute the uberrima fides doctrine in insurance contracts to equity although no authority was cited to substantiate this proposition; see Keeton and Sheridan, Equity, 2nd edn, at 407.

84. See Randall (ed), Story, Commentaries on Equity jurisprudcnce, 3rd edn, at 91–93. According to Story J. Roman law had adopted a liberal doctrine requiring utmost good faith in all cases of contracts involving mutual interest. Concealment of matters pertaining to the intrinsic character and nature of the subject matter of the contract would amount to a breach of trust and confidence justly reposed. Both equity and common law proceeded upon this Roman doctrine and applied it to various categories of contracts of which the insurance contract was but one. It ought to be noted that in cases of contracts entered into under undue influence, Story J had specifically attributed the source of relief to equity in contrast to insurance contracts where there was no attribution to any such exclusive source.

85. The principle of restitutio in integrum (which dictates that the parties ought to be restored to their original positions before rescission can be permitted) operates quite differently in insurance contracts as opposed to other contracts. For the sale of goods, upon rescission the seller regains his goods and the buyer his money. This, however, is not so for insurance where avoidance often occurs after a loss has taken place. Although there is technical satisfaction of the principle in that the premium is returned to the insured and the insurer is released from his obligation to cover the risk, the insured is certainly not returned to his original position before the contract for he was then not laden with any uninsured loss.

86. In those circumstances where it can be assigned, an insurance contract will nevertheless be subject to equities and hence any third party interest will not defeat the right to ‘rescind’ for non-disclosure.

87. [1950] 2 KB 86.

88. In respect of the remedy of damages.