A contract of marine insurance, like other contracts, is a result of the will of the parties.
However, an Insurance Law doctrine tempers the negotiation freedom for an insurance policy, that of utmost good faith. Marine insurance contracts are uberrimae fidei; Aglaia Politou explains*
The duty of utmost good faith is relatively clear in the pre-formation context and it can be viewed as an umbrella covering the duty of disclosure. Section 18 of the Marine Insurance Act 1906 imposes the duty of disclosure of all material facts; in particular, facts which are related to the risk weighing the decision of the underwriter. In addition to materiality, there must also be actual inducement of the insurer into the contract. English courts have recognised that the rules as originally applied had the potential of being unfair and have accordingly narrowed the definition of materiality while expanding the concept of inducement.
The remedy for a breach of utmost good faith is found in section 17 of the Marine Insurance Act 1906 as simply avoidance of the contract ab initio. Avoidance entails that the insurer is retroactively freed of any liability under the contract and any benefits received by the assured are returned. The remedy is effective from the moment the insurer elects to avoid and is not dependent on any judicial process while it has been criticised for its severity, especially because it follows upon any and all breaches of good faith, even if it was merely a result of carelessness.
However, the reasoning expressed in the modern cases demonstrates a significant shift in the way the courts approach the duty of good faith. The process of recalibrating the insured’s pre-contractual duty of good faith is not being done in isolation from other aspects of the insurance contract. The courts are also adding content to the duty of good faith which the insurer owes to the insured at the time the risk is presented, at the time when the remedy of avoidance is exercised and at the time when insurers assert the benefit of claims clauses.
In the same direction, it is not surprising for the notion of good faith to have its post-contractual application. Section 17 of the Marine Insurance Act 1906 is not limited in language to the pre-formation context and there are a number of cases where a post-contractual breach of the duty of disclosure has been argued by insurers. The highpoint of applying a post-formation duty of utmost good faith are ‘The Star Sea’, ‘The Mercandian Continent’ and ‘The Aegeon’. Fraudulent claims are today recognised as a separate legal doctrine founded on public policy. Section 17 does not trigger during the claims process so an insurer cannot avoid the policy ab initio on the grounds of fraud. If all or part of the claim is fraudulent, the assured will not be permitted to recover in respect of any part of the claim. However, the authorities failed to address whether a fraudulent claim brings the insurance contract to an end or not.
During the judicial discussion in the leading case of ‘The Star Sea’, Lord Hobhouse stated that, although utmost good faith does not come to an end after the formation of the contract, there is no such obligation in relation to the duty of disclosure, since the original material risk has been accepted by the insurer. On the other hand, Lord Clyde interpreted the duty of disclosure in terms of the degree of disclosure required in each stage of the contract. He clarified that a very high degree of openness is reasonably required at the stage of formation of the contract but not necessarily the same degree continues once the contract has been made. Hence, Lord Clyde supports the view that the nature of the duty of disclosure fluctuates depending on the stages of the contract. It is clear that both their Lordships consider the duty of utmost good faith as the cornerstone of the contract. However, the difference in their opinions lies in the fact that Lord Hobhouse believes that there is not necessarily a continuing duty of disclosure after the formation of the contract while Lord Clyde supports the continuing nature of the duty albeit in a possibly lower level.
The judgment in the ‘The Star Sea” favoured Lord’s Clyde approach. Hence, the nature of the duty of disclosure would appear to fluctuate depending on the stages of the contract. Because, however, the precise nature and content of the post-contractual duty was not spelt out further, this has given rise subsequently to difficulties, most notably as to when the remedy of avoidance ab initio will be available.
Moreover, Lord Hobhouse acknowledged in ‘The Star Sea’ that: ‘An inevitable consequence in the post-contract situation is that the remedy of avoidance of the contract is in practical terms wholly one-sided.’ Diversifying the duty of utmost good faith would make it possible to allow different contents of the duty. Thus, it is suggested that statutory reform to the Marine Insurance Act 1906 is both desirable and inevitable. Despite the fact that both the scope of the duty of disclosure and the remedy of avoidance can be circumscribed by contractual means, it is submitted that the clauses cannot accommodate all the facets of the duty of good faith.
Under English Insurance Law, it is established law that a claim under an insurance policy is a claim for damages and there is no right to damages for late payment of claim or indemnity, as held in President of India Lips Maritime Corporation (The Lips) and followed reluctantly by the Court of Appeal in the key case of Sprung v Royal Insurance (UK) Limited.
The Law Commission considers that Sprung is out of line with the principles of ordinary Contract Law and with its Consultation Papers No.6 (Damages for Late Payment and the Insurer’s Duty of Good Faith) and No.7 (The Insured’s Post-Contract Duty of Good Faith) of 2010, proposed that insurance contracts be treated in the same way as ordinary contracts. In addition, it proposed that the core duty of good faith should be non-excludable, as it would be expected in a contract of uberrimae fidei. However, in business insurance, the parties would be free to agree to contract terms excluding liability for failure to pay within a reasonable time. It also proposed that damages for distress, inconvenience and discomfort should be made available for delayed payments.
To sum up, there appears to be a general consensus that the remedies available under English law for a breach of the duty of good faith are out of step with today’s commercial realities and can be unclear and confusing. Statutory reform will benefit the London Market since prospective assureds generally prefer fair law which is not too demanding upon them. Such reform will increase the potential of the London Market to compete with foreign markets which nowadays offer more ‘assured-friendly’ law and regulations. In this direction, it is submitted that both the courts and the Law Commission with the Consultation Papers No.6 and No.7 of 2010 have attempted to strike a balance between the rights of the insured and the insurer.
*Aglaia Politou is a shipping lawyer and a scholar of The City Law School of City University London for the LL.M in Maritime Law. She read law in London and France and she specialised in Private International Law at The Hague Academy of International Law in The Netherlands. Miss Politou has worked for international and European institutions of high prestige in Brussels, Strasbourg and Athens and she is an active member of the Founding and Steering Committee of the Young Maritime Professionals of the London Shipping Law Centre. She is a native Greek speaker while she is fluent in English, French, Russian and Ukrainian. Other articles in relation to Miss Politou include ‘Shipping Scholarships’, ‘The Admiralty Claimant after The Indian Grace No.2 Ruling’ and ‘The Legal Status of Joint Operating Agreements in Oil Production’.