Chapter 6: Utmost Good Faith, Disclosure and Representations

A contract of marine insurance is uberrimae fidei or, as enunciated in s 17 of the Marine Insurance Act, ‘a contract based upon the utmost good faith’. The notion of utmost good faith, the cardinal principle governing the marine insurance contract, is a well established doctrine derived from the celebrated case of Carter v Boehm (1766) 3 Burr 1905, decided long before the inception of the Act. With the codification of the law, the principle found expression in ss 17–20: in s 17 is presented the general duty to observe the utmost good faith, with the following sections introducing particular aspects of the doctrine, namely, the duty of the assured (s 18) and the broker (s 19) to disclose material circumstances, and to avoid making misrepresentations (s 20).

The obligations to disclose and to abstain from misrepresentations constitute the most significant manifestations of the duty to observe utmost good faith. Both ss 18 and 20 echo the rule that every ‘material circumstance’ must be disclosed to the insurer ‘before the contract is concluded’. Section 17, unlike ss 18, 19 and 20, does not specify when the duty of utmost good faith is to be observed. Whilst ss 18 and 19 spell out the duty of disclosure before the formation of the contract, the Act is silent about any such duty after the conclusion of the contract. For a long time, the overwhelming concern was, whether an assured was under any duty to disclose material information after the conclusion of the contract. The nature and scope of the duty to observe utmost good faith were thus called into question; in particular, whether a continuing duty of disclosure is embraced within s 17.

Hirst J (as he then was), in Black King Shipping Corporation v Massie, ‘Litsion Pride’ [1985] 1 Lloyd's Rep 437, introduced a novel concept in the law when he extended the duty of disclosure to circumstances beyond the conclusion of the contract. Litsion Pride has made it patently clear that the duty of utmost good faith is not only overriding, going beyond the obligations set out in the following sections, but that it is also continuing. Hirst J also referred to the duty not to make fraudulent claims as a facet of the duty to observe utmost good faith. Recently, the approach of Hirst J found approval in a number of cases, the most notable of which is Bank of Nova Scotia v Hellenic Mutual War Risks Association, ‘Good Luck’ [1988] 1 Lloyd's Rep 514; [1989] 2 Lloyd's Rep 238; [1991] 2 Lloyd's Rep 191, HL.

The legal effect of a breach of the duty is severe: the only remedy available to the innocent party is avoidance ab initio, that is, avoidance from the very beginning, even though the breach may have occurred during the course of the contract. The harshness of the rule is evident, and has been described by the courts as a ‘draconian remedy’. As the law of disclosure (s 18) and representation (s 20) both emanate from the doctrine of uberrimae fidei, it is only natural that the same remedy should apply to both.

How the ‘materiality’ of a circumstance is to be judged has also generated controversy in recent years. Fortunately, the matter has now, after much debate, been finally resolved by the House of Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1994] 2 Lloyd's Rep 427, HL. The House also clarified the law relating to the right of avoidance and has, in upholding the ‘actual inducement’ test, rejected the ‘decisive influence’ test.

The content and nature of the duty of utmost good faith under s 17, its extent and scope, and the legal effects of its breach, the law of disclosure under s 18, and of representation under s 20, will be examined in this chapter.