The Continuing Duty of Good Faith?

Author:Mr Simon Goldring
Profession:Reynolds Porter Chamberlain

If an insured fails to disclose material facts prior to the inception of an insurance contract, then insurers may elect to avoid that contract and treat it as if it never existed, even if the non-disclosure is not causally connected to the loss in any way.

While the existence of the duty of good faith prior to policy inception is taken as read, does it continue so that insurers are entitled to avoid for the insured's conduct that takes place after policy inception? The answer is a qualified "yes".

S17 Marine Insurance Act 1906 provides that "a contract of ... 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". Unlike the following provisions of the statute, s17 is not limited to a pre-contractual context. This gives rise to the argument that insurers are also entitled to avoid insurance contracts for breaches of good faith that take place after policy inception.

The Litsion Pride1 seemingly represented the "high water mark" for those who argued that the duty of good faith continued after policy inception; the courts retrenched in the 15 years since then, and it was generally believed that the continuing duty of good faith applied in only two situations: where the insured invites underwriters to extend the risk, such as under a "held covered clause"; and where the insured submits a claim.

However, this analysis has been fundamentally revised by Longmore L J in the Court of Appeal decision of K/S Merc-Scandia v Lloyd's Underwriters2 . It is now clear that the duty of good faith survives the inception of the policy and continues at least until litigation ensues. However, insurers will only be entitled to avoid the insurance in situations analogous to those where they have an existing right to terminate the contract.

In this case, the insured fraudulently forged correspondence to support their application to have their dispute with the shipowners heard in Trinidad because they (erroneously) believed this to be a more favourable jurisdiction. Once this fraud was identified, the jurisdiction application was abandoned and insurers elected to avoid the policy. Judgment was entered against the insured who were soon afterwards wound up, and so the shipowners commenced proceedings directly against the insurers.

It was common ground that the commission of this fraud by the insured constituted a breach of the contractual obligation to...

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