Insurers, Claims and the Boundaries of Good Faith
| Author | John Lowry,Philip Rawlings |
| DOI | http://doi.org/10.1111/j.1468-2230.2005.00529.x |
| Published date | 01 January 2005 |
| Date | 01 January 2005 |
Insurers, Claims and the Boundaries of Good Faith
John Lowry and Philip Rawlings
n
This article examines the refusal of the English courts to award damagesfor consequential losses
following unreasonable delayon the part of insurers in settling a claim. This has the potential to
giver ise to direcons equences fori nsureds.These di⁄culties have been addressed in North Amer-
ican jurisdictions where the concept of good faith has been developed and applied as a means of
both compensating insureds and regulating the conduct of insurers. However, a hallmark of
English law is that it fails to drawa bright line between the law of contract and the lawof con-
tracts. As a result,the policy issues that should inform insurance contracts are excluded byvirtue
of the notion, imported fromthe law of contract, that the contractualrelationship is a matter of
privatelaw and is not, therefore, a means forpublic regulation of insurers.
INTRODUCTION
It is commonplace for writers of textbooks on English contract law to acknowl-
edge along with Sir Jack Beatson that,‘it is no longer safe to assume that there is a
law of contract rather than of contracts.’
1
Each area of commercial activity ^ and
each sub-division ^ has its own rules:there is the law ofcontracts of employment,
of sale of goods (with sub-divisions such as consumer sales and international
sales), of supply of goods and ser vices, of carriage of goods by sea and so forth.
Havingacknowledged this diversity, Beatson goeson to suggest thatover all these
areas spans‘a single bodyof generalprinciples of contract law whichapply, withor
without modi¢cation across the range of such contracts.’
2
This meant that there
has been a tendencyto see the law of contract as the ¢eldwithin which theoretical
debate is appropriate, while practical lawyering is left to the law of contracts.
Insurance law is a prime example of this, although certainly there have been
advances in the literature on insurance law in the last two or three decades,
3
but there remains a considerable gap when contrasted with theweight of analysis
n
Faculty of Laws, University College London.The authors thank the anonymous referees for their
constructive comments on an earlier version of this article.The usual di sclaimers apply.
1 J.Be atson,Anson’s Law of Contract(Oxford: Oxford University Press,20 02) 20.
2ibid.
3 Examples from the English insurance literature include, J.Birds and N. Hird, Birds’Modern Insur-
ance Law (London: Sweetand Maxwell, 2001);H. Bennett,‘Mappingthe doctri ne ofutmost good
faith in insurance contract law’[1999]LMCLQ 165; M.Clarke,The Law ofInsurance Contracts (Lon-
don, LLP, 2002);R. Hasson,‘The doctrine of uberrimae ¢des in insurance law ^ a critical evalua-
tion’[1969] MLR 615;R. Hasson,‘Subrogationin i nsurancelaw ^ a critical evaluation’[1985] OJLS
416; J.Lowry and P.Rawlings,‘Re-thinking insurable interest’in S.Worthington (ed),Commercial
Law and Commercial Practice (Oxford: Hart Publishing, 2003) 335^371; P. MacDonald Eggers,
P. Foss and S. Picken, Good Faith and Insurance Contracts (London: LLP, 2004); E. J. Macgillivray
et al, Macgillivray on InsuranceLaw (London:Sweet and Maxwell, 2002); R. Merkin, Colinvaux&
Merkin’s Insurance Law (London: Sweet & Maxwell, 2002); C. Mitchell,‘Defences to an Insurer’s
SubrogatedAction’ [1996] LMCLQ343.
rThe Modern LawReview Limited 2005
Published by BlackwellPublishing, 9600 Garsington Road,Oxford OX4 2DQ,UK and 350 Main Street, Malden, MA 02148, USA
(2005) 68(1) MLR 82^110
generated by US scholars and judges. One of the key themes of this article is to
suggest that this failure of analysis has a practical impact on insureds.This is illu-
stratedby considering thei nsurer’s obligation tothe insured when a claimis made
under the contract, for while there is a signi¢cant body of recent case law onthe
duty of good faith owed by the insured when making a claim,
4
there has been
almost no consideration of the duty that might be owed by the insurer.
It is a fundamental requirement of civil law jurisdictions that contracting par-
ties act in good faith, although there is no conse nsus on the content of this duty.
5
Many common law countries have also adopted this idea,
6
but English law has,
thus far at least, resisted its charms.
7
English lawyers believe theyknow what bad
faith is, even if they arerarely calledon toidentify it, but they are reluctantto press
on towards a positive duty of good faith. Good faith is regarded as too vague and
would, therefore, undermine that certainty which is perceived as a hallmark of
English commercial law.
8
It is thought to imply a co-operative view of contractual
relations that is inimical to the English model of contract as a bargain. Lord Ack-
ner rejected the idea of requiring parties to negotiate in good faith at the pre-con-
tractual stage as ‘inherently repugnant to the adversarial position of the parties
when involved in negotiations.Each party to the negotiations is entitled topursue
his (or her) own interest, so long as he avoids making misrepresentations.’
9
This
does not mean that English contract law is perceived as producing outcomes that
do not accord with fairness. Speak ing of good faith, Bingham LJ suggested that
the law of contract ‘has, characteristically, committed itself to no such overriding
principlebut has developed piecemeal solutions in response todemonstrated pro-
blems of unfairness’.
10
He took the view that devices such as the Unfair Contract
Terms Act 1977, misrepresentation, promissoryes toppeland u ndue in£uence‘may
yield a result not very di¡erent from the civil law principle of good faith’.
11
4 See J. Lowry and P. Rawlings, InsuranceLaw: Casesand Materials (Oxford:Hart Publishi ng, 2004)
chapter11.
5Director Generalof FairTrading vFirst National Bank [20 02] AC 481, 494, per Lord Bingham; J. M.
Thomson,‘Good Faith in Contracting: A Sceptical View’i n A. D. M. Forte (ed), Good Faith in
Contract and Property Law (Oxford: Hart Publishing, 1999); R. Zimmerman and S. Whittaker
(eds), Good Faith in EuropeanContract Law (Cambridge: CUP, 20 00).The Principles of European
Contract Law1998, Art 2: 301state that, while a party is free to negotiate and is not liable for
failing to reach an agreement, there will be liability forlosses caused to the other party i f negotia-
tions are conducted orare broken o¡ ‘contraryto good faith and fair dealing’; and, in particular,it
is contrary to good faith and fair dealing ‘for a party to enter into or continue negotiations with
no real intention of reaching an agreement with the other party.’ Art1.106(1)requires each party
‘to act in accordance with good faith and fair dealing’ in exercising rights and in performing
duties under the contract.
6 The USA’sUniform Commercial Code is rooted i n the idea of good faith: y1- 203 states thatevery
contract that comeswith in the terms of the Code‘imposes an obligation of good faith in its per-
formance or enforcement’. Good faith is‘honesty in fact’ (y1-201).The Restatement, Contracts
(2d) also includes a dutyof good faithi n performance and enforcement of contracts (y205).
7 R. Brownsword, Contract Law:Themes for theTwenty First Century (London: Butterworths, 2000)
chapter 5;J. Beatson and D. Friedmann (eds),Good Faith and Faultin ContractLaw (Oxford: OUP,
1995); E. McKendrick,‘Good Faith: A Matter of Principle?’ in A. D. M. Forte (ed),Good Faith in
Contract and PropertyLaw, n 5 above.
8UnionEagle Ltd vGolden Achievement Ltd [1997] AC 514.
9Wa l f o r d vMiles [1992]2 AC 128.
10 Interfoto PictureLibraryLtd vStilettoVisualProgrammesLtd [1989] QB 433,439, per Bingham LJ.
11 ibid 445,per Bingham LJ. See also, E. McKendrick, n 7 above.
John Lowry and Philip Rawlings
83rThe Modern LawReview Limited 2005
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