Utmost Good Faith in UK Law

Ordinarily the failure to disclose a material fact which might influence the mind of a prudent contractor does not give the right to avoid the contract. There are certain contracts expressed by the law to be contracts of the utmost good faith where material facts must be disclosed; if not the contract is voidable. In such cases the duty does not arise out of contract; the duty of a person proposing an insurance arises before a contract is made; so of an intending partner.

Such a course would be so starkly unjust that I would hold that in such a case it would be unconscionable for the court to permit the insurers to avoid the policy on the grounds of non-disclosure. Having regard to the equitable origin of the jurisdiction to avoid a policy for breach by the assured of the duty of the utmost good faith, the court should not be inhibited from giving effect by appropriate orders to the insurers' countervailing duty of the utmost good faith to the assured.

In our judgment, the duty falling upon the insurer must at least extend to disclosing all facts known to him which are material either to the nature of the risk sought to be covered or the recoverability of a claim under the policy which a prudent insured would take into account in deciding whether or not to place the risk for which he seeks cover with that insurer.

We do not think that the nature of the contract as one of the utmost good faith can be used as a platform to establish a common law duty of care. Parliament has provided that in the case of marine insurance the consequence of a failure to disclose a material fact, and by inference the only consequence, is that the contract may be avoided. It is not suggested that the consequences in non-marine insurance should be different.

In my view the idea of good faith in the context of insurance contracts reflects the degrees of openness required of the parties in the various stages of their relationship. The substance of the obligation which is entailed can vary according to the context in which the matter comes to be judged.

What relationship need there then be between any fraud and the claim, if the fraudulent claim rule is to apply? Speaking here of a claim for a loss known to be non-existent or exaggerated, the answers seem clear. The application of the rule flows from the fact that a fraudulent claim of this nature has been made. The only further requirement is that the part of the claim which is non-existent or exaggerated should not itself be immaterial or unsubstantial: see paragraphs 32–33 above.