Introduction
This paper discusses the principle of utmost good faith (uberrimae fidei) in the
contract of insurance. It will begin by giving a synopsis of what it is and then show
why it is important in insurance contract and lastly show consequences of non-
disclosure. Thereafter, it will draw a conclusion.
The Principle of Utmost Good Faith
The principle of utmost good faith was laid down in the case of Rozanes v. Bowen1
in which it was said that since it is to be presumed that the underwriter knows nothing
and the assured knows all, the latter must disclose the same. It therefore stands to
reason that an insurance contract is a contract uberrimae fidei. Both the insured and
the insurer are expected to conduct their business in good faith. The buyer has a duty
to disclose all facts related to the risk to be covered by the insurance contract. In a
similar vein, the insurer also has a duty to inform the insured of all the terms of the
contract. In most cases it is the insured or assured who bears the brunt to disclose.
This is so because very often the insurer has to depend upon what details the insured
mentions in his contract. Volunteering wrong information not only affects the insurer
but also other people involved in the insurance pool whose premiums may be
wrongly applied to satisfy the claims. Therefore, it is a requirement that the assured
make a full disclosure of all material facts within their knowledge about the risk.
The duty to show good faith squarely falls on the insured as well as the insurer and
their agents, to disclose all material facts within their knowledge, in all types of
insurance contracts. This clearly came to the fore in the case of Banque Financiere
de la cite S.A v. Westgate Insurance Co. Ltd.2 In this case, the plaintiff bank had
agreed to lend some 30 million pounds securities in the form of some gemstones and
1
[1928] 32 L.I.L.R. 98.
2
[1989] 2 All ER 982.
some credit insurance policies. The gemstones when valued did not prove to be
worth much. So the bank sought to rely on the insurance policies. The policies had
been brokered by a major firm of brokers who resorted to a series of false covers due
to inability to obtain full cover. On making claims under the policies, the bank
discovered severe shortage in cover. It was held that the insurers were under
obligation to disclose the same. It was also held that the only remedy available to the
insured is to rescind the policy and claim the premium. No other damages were
awarded. The contract of insurance is therefore, one of utmost good faith (uberrimae
fidei) where the duty of disclosure lies on both parties.
The Importance of Utmost Good Faith in Insurance Contract
The Marine Insurance Act, 1906 (hereinafter the Act) incorporates within it the
principle of utmost good faith. In sections 18 20 of the Act, it touches on the pre-
contractual duty of good faith at length. A failure to disclose facts material to an
insurance contract, even if done innocently will entitle the insurer to avoid the
contract within a reasonable time period. This rule is rooted in the landmark case of
Carter v. Boehm3 in which L. Mansfield stated that:
Insurance is a contract of speculation. The special facts upon which the
contingent chance is to be computed lie most commonly in the knowledge of
the assured 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 circumstances do
not exist. ... Good faith forbids either party, by concealing what he privately
knows to draw the other into a bargain from his ignorance of the fact, and his
believing the contrary.
3
[1766] 3 Burr. 1905.
Here Mansfield is only talking about the obligation of the insured towards the insurer
at the time of making of the contract. Mansfields statement fails to cover such
disclosures as are ought to be made by the assured after the completion of the
contract and during the validity of the policy. The duty of utmost good faith
continues even after the contract is made. In the momentous case of Black King
Shipping Corp. v. Massie,4 the assured ship owners did not disclose to the
underwriters that the vessel was about to enter a dangerous part of the Persian Gulf
so as to avoid having to pay a higher war risk premium. The vessel was struck by an
Iraqi missile, and the owners then presented a fraudulent claim by lying to the
underwriters about the vessels position at the time of the casualty. The court held
that the underwriters were entitled either to avoid the policy for fraud or deny the
particular claim.
Consequences of NonDisclosure
Lord Atkin in the case of Bell v. Lever Bros Ltd5 stated that the law requires the
assured to disclose all material facts. Failure to do so entitles the insurer to repudiate.
Remember, a contract of insurance is a contract of utmost good faith and this is
required from both the assured and the insurer. Here the principle of caveat emptor
is incongruous with the doctrine of uberrimae fidei in the law of insurance and this
is so to prevent fraud and encourage good faith.6 Failure to disclose any material fact
would render the contract voidable. The aggrieved may notify the other party that
they wish to avoid the contract upon discovering the non-disclosure. In this way, that
party would be discharged from their obligations under the contract.7
4
[1985]1 Lloyds Rep. 437.
5
All ER Rep (1st) [1931] 32, 1932 A.C. 161 227.
6
J. Birds, Modern Insurance Law, 3rd edn., London, Sweet and Maxwell, 1993.
7
Lambert v. Cooperative Insurance Society Limited, [1975] 2 L1. L. R. 485.
The remedy for non-disclosure is rescission ab initio of the policy at the behest of
the insurer. This entitles the insurer to treat the policy as void without necessarily
obtaining an order of the court. All he needs to do is to inform the insured that the
policy is being avoided due to non-disclosure. In the famous case Carter vs. Boehm,8
it was pointed out that the special facts upon which the contingent chance is to be
completed, lie more commonly in the knowledge to mislead the underwriter into a
belief that the circumstances do not exist. Holding back such circumstances is fraud
and renders the policy void. The synopsis of the case is that a policy was affected
against the loss of Fort Marlborough by its being captured by foreign enemy. The
policy was for the benefit of George Carter, the then Governor of the fort. It was
alleged that the weakness of the fort and its probability of being attacked was not
disclosed, and hence the policy was void. It was held that it was the duty of the
assured to make full disclosure to the insurer because the underwriter did not know
of such circumstances which was a material fact to the contract.
Conclusion
From the above discussion, it can be concluded that the fundamental principle of the
contract of insurance rests on the principle of utmost good faith and that it must be
religiously observed by both the insured and the insurer. Any fraud or
misrepresentation whether innocent or otherwise of any facts vitiates the contract of
insurance.
8
[1766] 3 Burr. 1905.
BIBLIOGRAPHY
Statutes
The Marine Insurance Act, 1906.
Case Law
Banque Financiere de la cite S.A. v. Westgate Insurance Co. Ltd 2 All ER [1989]
982.
Bell v. Lever Bros Ltd, All ER Rep (1st) [1931] 32, 1932 A.C. 161 227.
Black King Shipping Corp. v. Massie 1 Lloyds Rep. [1985] 437.
Carter v. Boehm 1905, [1766] 3 Burr.
Lambert v. Cooperative Insurance Society Limited, (1975) 2 L1. L. R. 485.
Rozanes v. Bowen [1928]32 L.I.L.R. 98.
Books
J. Birds, Modern Insurance Law, 3rd edn., London, Sweet and Maxwell, 1993.