The Duty Of Disclosure - Part 1 of 2

Introduction.

It is a fundamental principle of insurance law that the utmost

good faith must be observed by each party. This rule was stated

clearly by Lord Mansfield since 1766, when he said1that:

"Insurance is a contract upon speculation. The special facts,

upon which the contingent change is to be computed, lie more

commonly in the knowledge of insured only: the underwriter trusts

to his representation and proceeds upon confidence that he does not

keep back any circumstance in his knowledge, to mislead the

underwriter into a belief that the circumstance does not exist and

to induce him to estimate the risqué as if it did not exist.

The keeping back of such a circumstance is a fraud and, therefore,

the policy is void. Although the suppression should happen through

mistake, without any fraudulent intention; yet still the

underwriter is deceived and the policy is void; because the

risqué run is really different from the risqué

understood and intended to be run at the time of agreement . . .

The governing principle is applicable to all contracts and

dealings. Good faith forbids either party by concealing what the

privately knows, to draw the others into a bargain from his

ignorance of that fact and his believing the contrary".

In 1879, Jessel M R said that2: "The first

question to be decided is, what is the principle on which the court

acts in setting aside contracts of assurance? As regards the

general principal I am not prepared to lay down the law as making

any difference is a substance between one contract of assurance and

another. Whether it is life, or fire or marine insurance, I take it

good faith is required in all cases, and though there may be

certain circumstances from the peculiar nature of marine insurance

which requires to be disclosed and which do not apply to other

contracts of insurance, that is rather, in my opinion, an

illustration of the application of the principle than a distinction

in principles".

Also in 1928, Scrutton L J observed3 that: "It

has been for centuries in England the law in connection with

insurance of all sorts, marine, fire, life, guarantee and every

kind of policy, that as the underwriter knows nothing and the man

comes to him to ask him to insure knows everything it is the duty

of the assured, the man who desires to have a policy, to make a

full disclosure to the underwriter without being asked of all the

material circumstances, because the underwriter knows nothing and

the assured knows everything. That is expressed by saying that it

is a contract of the utmost good faith - uberrina fides".

As far as marine insurance is concerned, the Marine Insurance

Act 1906, Section 17, provides that: "A contract of marine

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". It is the duty of parties

to help each other to come to a right conclusion and not to hold

each other at arms length in defence of their conflicting

interests.4It is the duty of the assured not only to be

honest and straightforward but also to make a full disclosure of

all material facts.5 A failure to disclose, however,

innocently, entitles the insurer to avoid this contract ab initio

and, upon avoidance, it is deemed never to have

existed.6

1.2 The duty of disclosure is not the same as that of

representation.

Insurers can avoid insurance contracts if they were induced to

enter into them by a misrepresentation of material facts made by

the proposed which were false in material particular, whether the

proposed acted negligently or quite innocently.7 This

right differs little from that attaching generally in the law of

contract.

Historically, misrepresentation in the strict sense has not been

of particular importance in the insurance context. This is partly

because the extreme width of the duty to disclose material facts

has meant that often non-disclosure has subsumed questions of

misrepresentation. Cases have frequently failed to distinguish

between the two defences taken by an insurer and indeed it appears

to be standard practice for an insurer, where possible, to plead

both defences. While this may be conceptually

unsatisfactory,8 Lord Mustill held that the rules

relating to misrepresentation and non-disclosure at least as they

affect materiality and subsequent avoidance, should be, and indeed

always have been, the same.9 Whilst Lord Mustill's

proposition may be a desirable one from a practical point of view,

we would argue that the law may be wrong in theory, to assume that

an undisputed principle of misrepresentation must necessarily apply

to non-disclosure. Lord Mustill's judgement is based upon this

assumption. This is not surprising if one considers that the rules

relating to misrepresentation have been developed by the Courts of

Equity, whilst non-disclosure is decidedly a creature of the common

law.10 Furthermore, an innocent misrepresentation, on

its true construction can never be an actionable non-disclosure -

one is not held liable for not disclosing what one does not know

and it is the representor's genuine belief in the truth of his

statement that distinguishes the innocent misrepresentation from

the fraudulent.11

Remedies also present a problem when misrepresentation and

non-disclosure are treated as one and the same. Traditionally, the

remedy for misrepresentation has always been recession, granted by

the Courts of Equity. The common law gave no remedy for innocent

misrepresentation although it always recognised fraud. The remedy

for non-disclosure is a common law remedy. So now if

misrepresentation and non-disclosure are the same creature, and is

an equitable one, this automatic right to avoid the contract must

become questionable. Will the judiciary be able to deny avoidance,

even if materiality and inducement are proved, and insist instead

that the innocent party settles for damages?12 Finally,

it is not understandable why his Lordship held that inducement is

required for non-disclosure as well as

misrepresentation!13 This is absolutely novel in

relation to non-disclosure, although not of course to

misrepresentation - inducement has always been a requirement for

misrepresentation, at least in the general law of contract. Also it

is difficult to appreciate how an undisclosed fact is contrast to a

misrepresented one can actually induce an insurer into making a

contract. A misrepresented fact clearly can be an inducement, but

to suggest that something the insurer has no idea of its existence,

can actually induce him into making a contract seem, with respect,

rather odd.14

1.3 Non-Disclosure.

The insured is under a duty to disclose all material facts

relating to the insurance which he proposes to effect. In addition,

he must make no misrepresentation regarding such facts. Usually,

however, these duties are modified by the terms of the contract.

The burden of proving that there has been a breach of duty on the

part of the insured rests on the insurer.15

1.3.1 Disclosure by the Assured Himself.

Section 18(1) of the Marine Insurance Act 1906 states that:

"Subject to the provisions of this section, the assured must

disclose to the insurer, before the contract is concluded, every

material circumstance which is known to the assured and the assured

is deemed to know every circumstance which in the ordinary course

of business ought to be known by him. If the assured failed to make

such disclosure, the insurers may avoid the contract". The

assured then must disclose all material facts which are within his

actual or presumed knowledge.

1.3.2 Actual Knowledge.

It is the duty of the proposed assured to disclose to the

insurers all material facts within his actual knowledge. The

special facts distinguishing the proposed insurance are, as a

general rule, unknown to the insurers who are not in a position to

ascertain them. They lie, for the most part, solely within the

knowledge of the proposed assured.16

Thus, Kennedy L J said that17: "No class of case

occurs to my mind in which our law regards mere non-disclosure as

invalidating the contract, except in the case of insurance. That is

an exception which the law has wisely made in deference to the

plain exigencies of this particular and most important class of

transactions. The person seeking to insure may fairly be presumed

to know all the circumstances which materially affected the risk,

and, generally, is, as to some of them, the only person who has the

knowledge; the underwriter, whom he asks to take the risk, cannot

as a rule, know and rarely has either the time or the opportunity

to learn by enquiry, circumstances which are or may be most

material to the formation of his judgement as to this acceptance or

rejection of the risk and as to the premium which he ought to

require".

Further, in another case, Fletcher Moulton L J, remarked

that18: "Insurers are thus in the highly favourable

position that they are entitled not only to bona fides on the part

of the applicant but also to full disclosure of all knowledge

possessed by the applicant that is material to the risk".

Good faith, therefore, requires that he should not, by his

silence, mislead the insurers into believing that the risk, as

proposed, differs to their detriment from the risk which they will

actually run.19 On the contrary, he should help them by

all means in his power to estimate the risk at its proper

value.20

The duty of disclosure requires that statements made by the

proposer be that of facts not of opinion. A mis-stated opinion is

actionable only if not given in good faith. However, the

distinction between questions of fact and questions of opinion is

not always an easy one, it may not matter greatly in

practice.21 This point can be illustrated, particularly,

by the example of proposals for life insurance, where a proposer

may very well not know highly material facts regarding his health

because he is not an expert or if he does not know something may

very fail...