The assured’s post-formation duty of utmost good faith in marine insurance

Abstract: The doctrine of utmost good faith in insurance contracts has long been a part of English law. It was codified with the Marine Insurance Act 1906. In the pre-formation stage the doctrine consists of a duty to avoid non-disclosure and misrepresentation. Which facts are to be disclosed or represented under the doctrine is determined by a test of materiality. The assured does not have a duty to disclose every piece of information that he might have, only that which is material to the risk. Both facts related to the physical hazard and the moral hazard can be material. The physical hazard concerns the actual object, usually a ship, whereas the moral hazard is for example the moral integrity of the assured. Materiality is determined using a “prudent insurer” test, seeing what a hypothetical insurer would have factored in during his decision-making. There is now also a subjective element, inducement. Even material non-disclosure cannot result in the prescribed remedy for a breach if there was no actual inducement into the contract resulting from it. What is the purpose of utmost good faith in the Marine Insurance Act 1906? The definition of materiality and the now established requirement of inducement demonstrate that the purpose of utmost good faith and the assured’s duty of disclosure and non-misrepresentation is to aid the underwriter in making an informed decision as to whether he wants to enter into the contract and at what premium. Those duties as detailed in sections 18 and 20 of the Act no longer apply after the decision has been made. Once an insurance contract has been entered into, there is no general duty of the assured to keep supplying the insurer with information for the duration of that contract. That would clearly place a too big burden on the assured and give the insurer a way to escape cover. Nevertheless, the doctrine of utmost good faith continues to play a role after the formation of the contract, one that is not entirely clear. Some areas of post-formation utmost good faith can be identified. The three main areas discussed in judgements and debate are variation, held covered clauses and fraudulent claims. Support for a singular “overarching” principle of utmost good faith linking these, and other instances, together is derived from section 17 of the Marine Insurance Act which states that “A contract of marine insurance is a contract based upon 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.” There has been a desire to connect instances of post-formation good faith through this section, which would have the result that all post-formation breaches lead to avoidance. This is clearly not appropriate in all situations. While the courts support the idea of a single continuing principle, it does not need to be that in section 17. The problem of the courts being restricted to applying the “draconian” remedy of avoidance, even when it is too drastic, could be solved by treating all post-formation instances of utmost good faith as falling outside the scope of section 17 altogether. This would reduce section 17 to an introduction to the pre-formation sections 18 and 20. In The Star Sea Lord Hobhouse supported that only in cases of creation or variation of obligations should the doctrine apply. It appears it can only apply where the insurer has further underwriting decisions to make. The underwriter can be faced with a new decision if the assured wishes to alter the policy to change the scope or duration of the policy. If such a situation arises it is the equivalent of the underwriter making a new decision on whether or not to accept risk, and the duty of utmost good faith once again applies. In a situation where the assured is looking to alter the policy, his duty of disclosure and representation is limited to what would be material to the changes, not the entire policy. Section 17 should be reduced to a pre-formation introduction to the duties of sections 18 and 20 in the Marine Insurance Act 1906. The ultimate sanction of avoidance should be reserved for the breach of fraud. It is time to fully recognize a post-formation principle that falls outside the scope of section 17 and takes on a different nature in different situations. Only in cases of fraud should it be applied with full severity. While there have been calls for reform on the law of marine insurance that may be unnecessary as far as post-formation good faith goes, the current Act should allow for the suggested interpretation.