CHAPTER- I

INTRODUCTION

Insurance law is the practice of law surrounding insurance, including insurance policies and
claims. It can be broadly broken into three categories - regulation of the business of
insurance; regulation of the content of insurance policies, especially with regard to consumer
policies; and regulation of claim handling. The earliest form of insurance is probably marine
insurance, although forms of mutuality (group self-insurance) existed before that. The aim of
all insurance is to compensate the owner against loss arising from a variety of risks, which he
anticipates, to his life, property and business. Insurance is mainly of two types: life insurance
and general insurance. General insurance means Fire, Marine and Miscellaneous insurance
which includes insurance against burglary or theft, fidelity guarantee, insurance for
employer's liability, and insurance of motor vehicles, livestock and crops. A Contract of
insurance is a contract by which one party undertakes to make good the loss of another, in
consideration of a sum of money, on the happening of a specified event, e.g. fire accident or
death. Insurance may be described as a social device to reduce or eliminate risk of life and
property. Under the plan of insurance, a large number of people associate themselves by
sharing risk, attached to individual. The risk, which can be insured against include fire, the
peril of sea, death, incident, & burglary. Any risk contingent upon these may be insured
against at a premium commensurate with the risk involved. Insurance is actually a contract
between 2 parties whereby one party called insurer undertakes in exchange for a fixed sum
called premium to pay the other party on happening of a certain event. Insurance is a contract
whereby, in return for the payment of premium by the insured, the insurers pay the financial
losses suffered by the insured as a result of the occurrence of unforeseen events. With the
help of Insurance, large number of people exposed to similar risks makes contributions to a
common fund out of which the losses suffered by the unfortunate few, due to accidental
events, are made good. An insurer is a company selling the insurance; an insured or
policyholder is the person or entity buying the insurance. The insurance rate is a factor used
to determine the amount to be charged for a certain amount of insurance coverage, called the
premium.
In insurance, the insurance policy is a contract (generally a standard form contract) between
the insurer and the insured, known as the policyholder, which determines the claims which
the insurer is legally required to pay. In exchange for an initial payment, known as the
premium, the insurer promises to pay for loss caused by perils covered under the policy
language.
Insurance contracts are designed to meet specific needs and thus have many features not
found in many other types of contracts. Since insurance policies are standard forms, they
feature boilerplate language which is similar across a wide variety of different types of
insurance policies.

1
The insurance policy is generally an integrated contract, meaning that it includes all forms
associated with the agreement between the insured and insurer. In some cases, however,
supplementary writings such as letters sent after the final agreement can make the insurance
policy a non-integrated contract. One insurance textbook states that generally "courts
consider all prior negotiations or agreements ... every contractual term in the policy at the
time of delivery, as well as those written afterwards as policy riders and endorsements ... with
both parties' consent, are part of written policy". The insurance contract or agreement is a
contract whereby the insurer will pay the insured (the person whom benefits would be paid
to, or on behalf of), if certain defined events occur. Subject to the "fortuity principle", the
event must be uncertain. The uncertainty can be either as to when the event will happen (e.g.
in a life insurance policy, the time of the insured's death is uncertain) or as to if it will happen
at all (e.g. in a fire insurance policy, whether or not a fire will occur at all).
Insurance is a contract by which one arty in consideration of a price or premium aid to him
adequate to the risk becomes security to the other that he shall not suffer the loss, damage or
prejudice by the happenings of the perils (risk) specified to certain things which may be
exposed to them. Insurance is meant to protect men against uncertain events which may
otherwise be of some disadvantages to them. It is an assurance that a sum of money will be
paid to the person insured if a particular event happens. Insurance can also be referred to as
the equitable transfer of the risk of a loss, from one entity to another in exchange of payment.
Insurance may be defined as a social device to reduce or eliminate risk of life and property.
Under the insurance plan, a large number of people associate themselves by sharing risk,
attached to individual. The risks which can be insured against include fire, death, accident,
etc. It is a contract wherein return for the payment of premium by the insured, the insurer
pays financial losses suffered by the insured as a result of the occurrence of certain events.

INSURANCE IS A CONTRACT OF UTMOST GOOD FAITH

‘Uberrima fides’, sometimes also known as ‘uberrima fidei’, is a Latin phrase meaning
‘utmost good faith’ (literally ‘most abundant faith’). Uberrima fides is a name of a legal
doctrine which governs insurance contracts. This means that all parties to an insurance
contract must deal in good faith, making a full declaration of all material facts in the
insurance proposal. The principle of uberrima fides contracts with the legal doctrine ‘caveat
emptor’ (let the buyer beware). Commercial contracts are normally subject to the principle of
caveat emptor. But in insurance contracts, it is assumed that each party to the contract can
examine the item or service, which is the subject matter of the contract. Each party can verify
the correctness of the statements of the other party. There is no need to take statements on
trust. The principle of utmost good faith remains one of the most important doctrines
underlying the insurance law. In Banque Financierie de la Cite v. Westgate Insurance co.
Ltd.1, it was held that “the duty of disclosure is neither contractual, nor tortuous, fiduciary nor
statutory in character but is founded on the jurisdiction originally exercised by the Courts of
equity to prevent impositions.” Uberrima fides or utmost good faith is the name of the legal

1
(1989) 2 All. ER 982

2
doctrine which governs insurance contracts. This means that all parties to an insurance
contract must deal in good faith, making a full declaration of all material facts in the
insurance proposal. Thus, the insured must revealed the exact nature and potential of the risks
that he transfers to the insurer, while at the same time the insurer must make sure that the
potential contract fits the needs of, and benefits of the assured. Insurance policies are contract
between the insurer and the insured; the insurer undertakes to pay a certain sum of money on
the occurrence of uncertain future event to the insured. Utmost good faith means that the
parties to an insurance contract must deal openly and honestly to each other without
concealing the material information which could influence the decision of the other party.
The duty of utmost good faith mainly rests on the insured as the insured usually knows or is
deemed to know more about the subject matter than the insurer. Hence the principle of
uberrima fides is required to be observed in every insurance contract and its absence would
render the contract void and unenforceable.2

This principle requires a business buying insurance to

(1) Disclose all the material facts and information about the business;
(2) Not misrepresent the business; and
(3) Not provide information that is misleading.
This duty applies to all material facts and material information that the business knows, or
should know. A material fact has been defined in a number of legal cases as “any fact that
may influence the judgment of a prudent insurer in deciding whether to accept a risk and if
so, on what terms and conditions and at what level of premium.” Avoidance ab initio is the
permitted legal remedy even if (1) the disclosure was innocent or careless; and (2) the non-
disclosed fact was not relevant to the cause of any loss or associated claim that occurred. It is
unfair and disproportionate that an insurer is legally entitled to avoid all of the terms of an
insurance contact because of any non-disclosure of a material fact or material information.
The insured needs to develop suitable and sufficient procedures to facilitate full disclosure of
material facts and information. The primary purpose of these disclosure procedures is to
ensure that an accurate statement of all material facts and information is made. The disclosure
procedures should be fully documented to ensure that evidence exists to prove that due
diligence was applied to discovery and disclosure activities.

Insurance, however, is governed by the doctrine of utmost good faith, both at common law
and by reason of S. 17 of the Marine Insurance Ordinance, which applies both to marine and
non-marine insurance policies. One of the reasons for this is the natural imbalance between
the insurer and the insured in terms of knowledge. For example, in life insurance, before the
pre-contractual process of disclosure is commenced, the proposer for insurance is in a
position to know all about his state of health, previous ailments / operations, family history
and his habits such as smoking and exercise. If that person is not obliged to make full
disclosure, insurance could not work from the either insurer’s or the insured’s point of view.
The insurer initially would only consider offering a policy based on an average person’s life
expectation, the premium for which would tend to be too high for the healthy person to
contemplate (because he does not expect to die he does not want to pay too much by way of
2
Carter v. Boehm (1766)

3
premium), but at a rate that would attract people concerned about their health. The insurer
would know therefore that he would only receive applications from bad risk individuals and
therefore would not offer life insurance at all. It is to redress this possible fatal imbalance that
the duty of good faith has subsisted. Under it, the insured is obliged to disclose to the insurer
before the contract is made all matters that are material to the decision the insurer takes as to
whether to offer to insure at all and, if so, on what terms. The same goes for representations
made to the insurer – these must not be materially incorrect. Breach of this duty, which
generally ends when the contract is made, can be catastrophic for the insured. The insurer has
no right to claim damages for a breach of the duty – his only option is to avoid the policy ‘ab
initio’, which is to say he treats himself as never having been on risk.
This means:
1. All claims the insurer has already paid under the policy before he learned of the non-
disclosure or misrepresentation can be reclaimed by the insurer;
2. The insurer has no liability to pay any further claims as they arise;
3. The insurer returns the premium paid, unless the non-disclosure/misrepresentation
was fraudulent, in which case the insurer can keep the premium;
4. It does not matter whether the non-disclosure or misrepresentation was deliberate,
negligent or innocent; the insurer can avoid the policy;
5. It does not matter whether the fact that was not disclosed or misrepresented has
nothing to do with the claims that have arisen – as long as the matter would have
affected the decision of the insurer (and the reasonably prudent insurer) at the time the
policy was written, the insurer can avoid. So if a property is protected against fire and
burglary, and the insured misrepresented at inception that the property had a burglar
alarm, the insurer can avoid even if the property is never burgled but suffers damage
as a result of an accidental fire;
6. Legally, it does not matter that the insurer has not asked for the specific information
from the insured in the pre-contractual negotiations, although if he has not there are
arguments of waiver.

The terminological study of the notion of good faith reveals that this notion runs through a
number of concepts. Firstly, it appears that a number of systems consider that good faith
applies to the law of obligations generally, and not simply to contract law1. In addition,
beyond the sphere of contract law, good faith sometimes affects almost all private law. It is
found in such areas as family law, property law, and laws governing inheritance and gifts.

CHAPTER-II
4
 GOOD FAITH: A CRITICAL ANALYSIS

GOOD FAITH: DIFFICULTIES ASSOCIATED WITH THE CONCEPT:

Having reviewed the historical developments, it appears that good faith is a notion which
attracts great interest in contemporary law not only because of the functions it performs, but
equally, and especially, as a result of the vagueness that surrounds it. Although the notion
should not be rigid, it remains that the adaptability of the concept must fit within a certain
framework in order for its uses to be, to some extent, restricted.

GOOD FAITH: A NOTION WITH UNCERTAIN BOUNDARIES:

It is possible to distinguish two meanings and two functions of good faith. In the objective
sense, good faith is perceived as being the method used to moralize contractual relationships,
and to temper the inequalities that could result from the dogma of the autonomy theory. In the
subjective sense, good faith aims to protect the mistaken belief of one contracting party, and
to give effect to appearances. Even if the objective/subjective dichotomy is found in a
number of legal systems, this first rationalization effort was insufficient to dispel the multiple
uncertainties surrounding the notion and the functions of good faith. The primary cause of the
uncertainty remains, even today, the general absence of definition. The concept of good faith
seems to generate more interest based on its function than on its definition. “Good faith is
therefore usually said to be an open norm, a norm the content of which cannot be established
in an abstract way but which depends on the circumstances of the case in which it must be
applied, and which must be established through concretisation.

Most lawyers from a system where good faith plays an important role, will therefore agree
that these differences in theoretical conception do not matter very much what really matters is
the way in which good faith is applied by the courts: the character of good faith is best shown
by the way in which it operates. More than a rule, good faith is also used as a standard, a
general principle according to some, or a norm, a rule, a maxim, a duty, an obligation
according to others. These terminological and conceptual inconsistencies can for a large part
be explained by the frequent and anarchic use of good faith in different national laws and in
international law. However, this imprecision does not only result in disadvantages. In fact, a
substantive analysis reveals that good faith is an open norm the content of which cannot, nor
should not, be determined in an abstract manner, so that it is able to adapt to the particular
circumstances which surround it. Is that to say that the determination of the content of good
faith depends solely on the personality of the judge settling the litigation? Not necessarily. It
seems possible to objectivize the notion of good faith, by providing judges with guidelines,
without freezing the notion and detracting from its essential characteristic: adaptability.

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ACQUIS COMMUNAUTAIRE AND ACQUIS INTERNATIONAL:

Traditionally, three different meanings of the term “good faith” have been put forward.
Firstly, good faith is “a criteria of interpretation. To interpret a legal text be it a contract or a
treaty or a statute in accordance with good faith is to interpret it according to its real spirit and
not to interpret it strictly”. Such a view contrasts with pure formalism and is based upon the
traditional distinction in Roman law between actions of strict law and actions bonae fidei
(actions based on good faith). Secondly, good faith is a moral quality: “to be in good faith is
to behave loyally, sincerely, honestly; to keep one’s word; to keep one’s promise. Good faith
is thus the reverse of undue influence, of fraud; it rules out any malicious intent”. Finally,
good faith is “the mistaken belief in the existence of a certain legal situation. This good faith
“is always presumed understood in this way, good faith is the other side of mistake, to which
it is bound”. Good faith is a flexible term which refuses to be imprisoned in any one
particular definition.

The study of the Acquis Communautaire and Acquis International reveals that the triple
polysemy proposed is not irrelevant. On the contrary it reveals that good faith, being a
flexible concept, takes different forms according to the functions assigned to it. These
functions are themselves largely dependent upon the spheres or types of obligations to which
good faith applies: “Good faith is an “open” concept”. As a preliminary, it must be pointed
out that the concept “good faith” does not appear in all international or European texts. It is
also absent from certain international conventions. Moreover, many Community texts do not
even mention good faith. However, it does appear in a large number of texts and its scope is
increasing ever more in the light of the recent codification proposals. In these proposals, good
faith appears sometimes as a (I) norm of interpretation, sometimes as a (II) source of
obligations and sometimes as a (III) mistaken and forgivable belief, a ground for validity in
certain legal situations.

CHAPTER-III
6
 GOOD FAITH: AN HISTORICAL PERSPECTIVE

Three historical periods are distinguished below; Roman law, medieval law and the 19 th
century, period of the first codifications.

ROMAN ORIGINS:

The introduction of the notion of good faith in Roman contract law would undoubtedly have
been impossible without inspiration from the Greeks. Among others, the Stoics
PYTHAGORAS and ZENO produced works that were at the origin of notions of justice and
equity. “This new concept opens the contractual system to the ethics of what is just and
equitable, the latter, according to CICERO’s dream, linking all men, citizens or pagans, in a
universal society of boni viri, of good men”.

It is CICERO who left the most complete definition of good faith: “These words, good faith,
have a very broad meaning. They express all the honest sentiments of a good conscience,
without requiring a scrupulousness which would turn selflessness into sacrifice; the law
banishes from contracts ruses and clever manoeuvres, dishonest dealings, fraudulent
calculations, dissimulations and perfidious simulations, and malice, which under the guise of
prudence and skill, takes advantage of credulity, simplicity and ignorance”. One of the
particularities of Roman procedure was the formulae system. The praetor (a magistrate who
received citizens, listened to their pleadings, authorized or forbade a certain course of action,
verified allegations and brought the case before a judge) gave his approval only to requests
that could be expressed in specific, pre-determined formulae. There were a limited number of
formulae, which, in turn limited the number of available rights. If originally, the lender
ensured that the ancient formula was properly observed, after 150 B.C., he became competent
to create new formulae.

This period corresponds with the expansion of Rome into the entire Mediterranean basin. The
number of praetors grew, and the post of peregrine praetor, responsible for disputes among
‘foreigners’, the non-citizens, was created. It appears that it was during this period that the
procedure was profoundly modified. It is believed that the peregrines, as outsiders to the city,
could not use the ancient formulae, and their rights would therefore not have been
recognized. The peregrine praetor therefore settled disputes not by applying the law in force
for citizens, but by applying a law that he himself created.

It is in this context that good faith rights of action, bona fide judicia, were born. The lists of
good faith rights of action vary depending on the historical period, and thus depending on the
author. According to the Ciceron list, the bona fine judicia were filed in matters of
guardianship, fiduciary duty, and in agency, rental and sales contracts. GAIUS, two hundred
years later, added negotiorum gestorum, deposits, societas and actio rei uxoriae. Finally,
Justinian increased the list of right of actions to include pledges, claims to divide property,

7
claims to succeed to estates held by third parties and the actio praecriptis uerbis for
exchanges and estimation contracts. Initially designed to solve legal relationships for which
the law had never created a right of action (such as those between peregrines, to whom
Roman law could not apply), these rights of action were introduced by the urban praetor into
the jus civile (the civil law that applied only to Roman citizens) at the end of the second
century B.C. It is apparent that during this period, good faith allowed the judge to actively
intervene in legal relations protected by good faith rights of action (especially in the
determination of the quantum of damages, and in the creation of new obligations founded on
morality).

It also appears that it is from these good faith rights of action that contracts based on good
faith were born. These contracts of good faith concerned consensual contracts that
distinguished themselves from formal contracts by their conditions of validity and by the fact
that they were all in good faith, that is to say they came largely under the judge’s broad
power of interpretation. The bona fides forces the judge to determine what each party owes
the other. It is on this basis that the ius gentium introduced a fundamental principle in
contract law: consensualism. From then on, the consensual contract distinguished itself from
the contract of pure law, the principle trait of the ius civile, in that it was sanctioned by a
‘good faith right of action’, thus providing the judge with a significant margin of
appreciation, especially with regards to the amount of the damages awarded. This good faith
right of action also allows the judge to determine whether one party’s behaviour is in keeping
with the attitude of an ‘honest man’. In this type of contract, the judge’s interpretation is thus
dominated by the notion of good faith, and the parties’ intentions are considerably limited by
three types of obligations: (1) the essentially, without which an act cannot exist (for example,
the object sold and the price paid in a contract of sale), (2) the naturalia, that are included in
the contract unless expressly excluded (for example, a guarantee against attacks on property
rights), and (3) the accidentalia, which are only included in the contract by virtue of an
express clause (for example, a liabilities guarantee).

The practical use of the notion of good faith in Roman law is often illustrated through the
classic example of a contract of sale because of the importance attached to the seller’s duty to
inform with regard to the hidden defects guarantee and the guaranty against attacks on
property rights. Other illustrations include the theory of abuse of rights, the recognition of the
rebus sic stantibus principle etc. It is interesting to note that these illustrations of the role of
good faith in Roman law are easily transposable to contemporary law. In the fourth and fifth
century A.D., a split in the notion of bonae fidei contractus occurred. Contracts of good faith
were either concluded in ignorance of an unfavorable element, or were concluded with
neither constraints nor deceit and were thus immune from attack. If Roman law reserved the
use of the notion of bona fides for contract law and procedure, it appears that this requirement
was, on the one hand, extended to the entire jus commune (the law common to all Christian
European countries) and, on the other hand, became closer to aequitas.

8
GOOD FAITH IN MEDIEVAL LAW:

From the 12th century onwards, contracts of good faith as they had existed under Roman law
became the rule rather than the exception. A contract was concluded by the mere exchange of
consent. However the passage from the principle of EX NUDO PACTO ACTION NON
NASCITUR (“no right of action is created from a bare pact”) to that of CONSESU
OBLIGAT (“consent alone suffices”) occurred gradually, and apparently with great
difficulty. It appears as if consensualism was only recognized as a general principle in the
16th century. It is equally during the course of this period that good faith became a general
principle of both national and international commerce. This time period also saw the
generalization of the principle exceptio doli, which would later become the foundation for the
theory of abuse of right. In addition to the development of good faith, medieval law also bore
witness to the rapprochement between good faith (“bona fides”) and equity (“aequitas”).

On this question the German and the French Romanists adopt opposing positions. The former
first considered that the two notions were distinct before later treating them the same them
after the Byzantine period (476-1453). However, the French authors considered that good
faith was simply a manifestation of equity. Constantine even went so far as to proclaim this
theory as being an essential principle of the entire Roman legal system. Later, Justinian made
the jus aequuum into the supreme source of law. In practice, during the Byzantine legal
period, the functions of good faith and of equity largely overlapped. This overlap was
primarily caused by the enlargement of the notion of good faith, which had been given
general application, so that there was, on a practical level, confusion with aequitas.

This historical confusion thus allows for a better understanding of certain contemporary
problems, most notably that of the wording of articles 1134-3 and 1135 of the French Civil
Code, and of similar articles in other civil codes. However, above all, this confusion can be
used to justify the terminological distinction that appears in Dutch law, largely inspired by
German law which, in its latest Civil Code (BW) reform, chose to substitute “good faith”
with the expression “reason and equity”.

If Roman and Medieval law contribute to the understanding of the meaning that can be
attributed to good faith, the period of Napoleonic codification clarifies the meaning and the
purpose of good faith in contemporary law.

GOOD FAITH IN THE NINETEENTH CENTURY:

9
Little information exists regarding the concept of good faith during the period of Napoleonic
codification. However, a few points are discernable, notably the fact that good faith emanates
from the notion of ‘natural law’. It also appears as if it was generally recognized in
commercial transactions. However, “referring to God to legitimize the existence of good faith
leads to the automatic deferral to God regarding the content of the rule. Perhaps this explains
the absence of discussion regarding good faith in preparation work, in addition to the absence
of any definition and in depth study of good faith”.

If natural law served as the justification for the insertion of good faith into the French Civil
Code of 1804, this authority was undermined during the nineteenth century primarily by the
historical school and the Positivist doctrine. It was first the works of EMMANUEL KANT,
but especially those of Friedrich von SAVIGNY, that were at the origin of the historical
school. This school searched for the sources of all law in history. Positivism, which finds its
origins in the works of one of VON SAVIGNY’s contemporaries, AUGUSTE COMTE, is “a
theory according to which social sciences should be experimental sciences, and the law was
thus treated as a science of social relationships in which experience had an essential role”.

Nonetheless the notion had lost all of its meaning and new theories appeared in order to
determine the content of good faith. The School of Begriffsjurisprudenz held an opposing
view from that of the School Freirechtsbewegung. The former sought the recognition of a
legal order founded on precise and abstract concepts in order to avoid a judge’s arbitrary
discretion. The latter, begun through the works of JHERING, aimed to achieve a relaxing of
the law and of its interpretation. This school of thought is particularly important, for in
promoting the development of an interpretive and completive judicial power, it began the
renewal of the notion of good faith. However, just as the School of Begriffsjurisprudenz had
done, the School of Freirechtsbewegung fell into excess by proposing to completely detach
itself from the letter of the law and to grant but a secondary importance to the law. “The
directives that were intended for the judges were totally vague and would have exposed
parties to the greatest uncertainty”. Good faith therefore became a written rule that has seen
tremendous growth in a number of different national systems, even though it does not have a
definition. Nor is there any consensus regarding the exact legal nature of good faith. This
terminological and notional imprecision inevitably affects the function fulfilled by good faith
in contemporary law.

CHAPTER-IV
10
GOOD FAITH, AN INSTRUMENT OF INTERPRETATION:

The expression “good faith” often appears in the context the interpretation of legislation. In
this case, it is not given any specific definition. It seems to be understood as conflicting with
a narrow and strict interpretation of texts. It ensures a certain flexibility of interpretation and
prevents any paralysis which could otherwise result from a text being silent on an issue or
giving rise to some doubt. This principle of interpretation applies primarily, to all
international treaties. It sometimes takes on a particular value when it is applied to
international texts which seek especially to promote good faith (understood as a standard of
behaviour). These texts must indeed be interpreted with the aim of promoting a certain ideal
of justice and fairness in contractual relations. Good faith thus becomes a principle of
interpretation, no longer merely of the international texts but also generally of the contracts
which come under such texts.

A PRINCIPLE FOR THE INTERPRETATION OF INTERNATIONAL TREATIES

In public international law, good faith is a fundamental principle. Article 26 of the Vienna
Convention on the Law of Treaties, signed on 23rd May 1969 provides as follows: “Every
treaty in force is binding upon the parties to it and must be performed by them in good faith”;
article 31 clarifies: “A treaty shall be interpreted in good faith in accordance with the
ordinary meaning to be given to the terms of the Treaty in their context and in light of its
object and purpose”. This principle has in a way been repeated and consolidated by old article
5 of the EEC Treaty, now article 10 of the European Union Treaty: “Member States shall take
all appropriate measures, whether general or particular, to ensure fulfilment of the obligations
arising out of this Treaty or resulting from action taken by the institutions of the Community.
They shall facilitate the achievement of the Community's tasks. They shall abstain from any
measure which could jeopardise the attainment of the objectives of this Treaty.” The term
“good faith” does not appear as such in the text. However, it is generally admitted that this
text can be read as the transposition into the Community legal order of the directive laid
down by the Vienna Convention. From this point of view, the text serves the purpose of
“strengthening a pre-existing obligation” and is a “method of systematic interpretation” of
Community legislation. Here again its role goes beyond a mere norm of interpretation.

A DIRECTIVE FOR THE INTERPRETATION OF RULES RELATING TO CONTRACTS

Beyond this application to treaties in general, good faith plays a greater role as a regulator
where the said international treaties set out, more or less explicitly, to give good faith its full
importance in interpersonal relations. The Vienna Convention of 11th April 1980 on
international sale of goods illustrates this situation perfectly. Article 7(1) sets out that, in
interpreting the Convention, particular attention must be paid to the “observance of good faith
in international trade”. Good faith is thus defined as a guideline for the interpretation of the
whole Convention: the interpreter “must ensure compliance with good faith in international

11
trade”. This disposition undoubtedly introduces certain flexibility in conventional rules. Good
faith thus appears with a moral connotation, as a term used to regulate business life. If the
freedom of the contracting parties is essential to a market economy, the freedom of some
must coexist with the freedom of others: good faith presents itself as one of the regulating
principles able to achieve this coexistence.

A certain number of international texts aim to promote good faith in contractual relations.
They raise it to the status of a principle of interpretation of the dispositions they contain.
These observations lead, in a logical analysis, to a further observation: good faith acts as a
regulating principle, not only in the reading of international texts relating to contracts but also
in the interpretation of the contracts themselves.

A PRINCIPLE OF CONTRACTUAL INTERPRETATION

The idea that a contract must be interpreted according to the principle of good faith permeates
all the law relating to commercial contracts. It has developed notably in the frame of the LEX
MERCATORIA to such an extent that it has become one of its fundamental principles. In
fact, the requirement of good faith emerges directly from a number of international arbitration
awards, which establish a true “general principle according to which agreements must be
applied in good faith”. In international arbitration, the interpretation in accordance to good
faith is seen as “another way of favouring the interpretation according to the parties’ real
intention over a literal interpretation”.

When a term arouses controversy, one should interpret it in accordance to the good faith
principle”. Here “the bad faith of a party, who claims the benefit of the rigour of the law and
contract for himself, is invoked against such party. It is in fact a disguised way of introducing
equity”. The doctrinal projects of codification whether international or European, also make
use of good faith to this end. In each of the legal instruments, good faith is promoted to the
rank of general principle which covers all stages of a contract”. This high status changes the
function of good faith from an interpretative role to that of extending the content of a
contract. The phrase “good faith” is thus used in the UNIDROIT 3 Principles “to define a
regulating concept in reference to which a contract must be interpreted”. Article 4.8 of the
UNIDROIT Principles states that “where the parties to a contract have not agreed with
respect to a term which is important for a determination of their rights and duties, a term
which is appropriate in the circumstances shall be supplied, and paragraph 2 of the same
article adds: “in determining what is an appropriate term, regard shall be had, among other
factors to (a) the intention of the parties; (b) the nature and purpose of the contract; (c) good
faith and fair dealing; (d) reasonableness”.

The term is close to equity at least partly, and is reminiscent of article 1135 of the French
Civil Code according to which: “agreements are binding not only as to what is expressed
therein, but also as to all the consequences which equity, usage or statute give to the
obligation according to its nature”. Thus the Principles follow the French tradition: they do
3
International Institute for the Unification of Private Law

12
not distinguish between consensual agreements and formal agreements (formal agreements
with regard to which the principles of equity and good faith were unknown in the old law).
Nowadays, even in respect of a formal and written contract, good faith remains a relevant
principle of interpretation.

The GANDOLFI Principles are faithful to this view and use the term “good faith” in the same
way. Article 39, which sets out the rules regarding the interpretation of a contract, ends with a
final paragraph which is unambiguous: “In any event, the interpretation of a contract must not
reach a conclusion that is contrary to good faith or to common sense”. Moreover, it contains a
clause regarding implied contractual terms which is along the same lines (art 32, paragraph 1)
“besides the express clauses, the contents of a contract are made up of clauses (a) that are
imposed by the present Code or by the European and national clauses, even replacing
different clauses introduced by the parties (b) that derive from the duty of good faith. A
parallel can be drawn with article 44 of the Principles: “The consequences of a contract result
not only from the agreement between the parties but also from the articles of this Code as
well as from the national and European principles, usage, good faith and equity. From this,
we see that good faith is not only a guide to the interpretation of the parties’ intention but also
a tool which influences the content of the contract. Judges are ready to go beyond a simple
clarification of the parties’ intention; they seem prepared, encouraged by a number of
academics and by numerous international texts, to use good faith as a real norm of
interpretation even as a source of obligation.

CHAPTER-V

13
 GOOD FAITH, A STANDARD OF BEHAVIOUR: AN ANALYSIS

The expression "good faith", far from being univocal and unambiguous, is often regarded as a
"standard of behaviour", which can occasionally even materialize as a specific obligation.
This explains the use of expressions such as "duty of good faith" or "obligation of good
faith".

As pointed out by Professor JACQUET, "the principle of good faith, sometimes seen as a
basic principle of the lex mercatoria, can therefore be directly applicable to international
contracts. Thus, the principle of good faith can impose obligations of behaviour directly upon
the parties in the conclusion as well as in the implementation of the contract". Positive law
imparts a varying degree of importance to the notion of good faith. However, in documents
drafted by academics, the expression takes on a particular importance, especially through its
objective dimension.

POSITIVE LAW:
Reference to good faith as a standard of behaviour can be found in international as well as in
Community law.

THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL

SALES OF GOODS: AN IMPLIED OBLIGATION OF GOOD FAITH

Amongst the different international sources applicable to a contract, the notion of “good
faith” appears mainly in the United Nation Convention on Contracts for the International Sale
of Goods, 11 April 1980, in which the expression is abundantly used. However, it has an
ambivalent status: the Convention does not contain any provision imposing a duty of good
faith concerning the implementation of a contract. And whilst article 7(1) states that in the
interpretation of the Convention good faith should prevail, it does not impose an actual duty
of good faith upon the parties. This article would appear to be the result of a compromise
between the delegates of the civil law countries, favourable to the establishment of a duty of
good faith, and those of the common law countries, strongly opposed to this solution.

Indeed, "a suggestion put forward by Spain in favour of a specific provision, in spite the
support of most civil law countries, was met with a firm refusal emanating, for example, from
England". Consequently, interpretations of this convention vary. Some argue that because it
does not expressly impose a duty of good faith upon the parties, it simply means that such a
duty does not exist. For others, on the contrary, this principle does not need to appear in the
text to be accepted: a general principle of good faith can be implied. A half-way view is to
consider that such a duty implicitly underlies an important number of specific provisions in
the Convention so that this duty of good faith can be seen as one of the fundamental
principles on which the Convention is based.

14
This last interpretation is appealing. The fact is that without being explicitly mentioned, the
notion of good faith finds its way into an important number of articles in the Convention. For
example, article 29(2) states: "A contract in writing which contains a provision requiring any
modification or termination by agreement to be in writing may not be otherwise modified or
terminated by agreement. However, a party may be precluded by his conduct from asserting
such a provision to the extent that the other party has relied on that conduct". Also, in article
35(3): "The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for
any lack of conformity of the goods if at the time of the conclusion of the contract the buyer
knew or could have not been unaware of such lack of conformity".

A parallel can be established between this article and provisions from articles 38, 40 and 44.
Article 77 relating to the obligation to mitigate the loss can also appear as another expression
of the general principle of good faith between the parties. "A party who relies on a breach of
contract must take such measures as are reasonable in the circumstances to mitigate the loss,
including loss of profit, resulting from the breach. If he fails to take such measures, the party
in breach may claim a reduction in the damages in the amount by which the loss should have
been mitigated". Finally, article 80 of the Convention states that: "a party may not rely on a
failure of the other party to perform, to the extent that such failure was caused by the first
party's act or omission". In this last article, the good faith of the debtor is required; indeed the
debtor cannot rely on the slightest mistake of the creditor to avoid performing his obligations
under the contract.

THE UNITED NATIONS CONVENTION ON INDEPENDENT GUARANTEES AND STAND-

BY LETTERS OF CREDIT

Article 14 of the Convention entitled "Standard of conduct and liability of guarantor/issuer",

provides in its first paragraph that "the guarantor/issuer shall act in good faith and exercise
reasonable care having due regard to generally accepted standards of international practice".
The second paragraph states that the guarantor/issuer may not be exempted from liability "for
its failure to act in good faith or for any grossly negligent conduct". Article 19 clarifies this
general standard of behaviour by listing situations in which the guarantor/issuer can rely on a
right to withhold payment.

COMMUNITY LAW

Good faith seems to be at the very heart of European institutions. Article 10 of the
aforementioned Treaty on European Union (ex-article 5 of TEC) imposes upon Member
States a negative obligation to abstain from any measure which could jeopardise the
attainment of the objectives set out in the Treaty- as well as a two-fold positive obligation- to
take all appropriate measures to ensure fulfilment of their obligations under the Treaty and
facilitate the achievement of the Community’s tasks. Although the term “good faith” does not
explicitly appear in the text, the article has sometimes been interpreted as laying out a
principle of “good faith in Community law”, a principle of “loyal cooperation”. Initially

15
article 10 was analysed as a mere norm of interpretation the sole purpose of which was to
introduce the specific obligations inherent to the Treaty. Subsequently, the text was gradually
construed by the ECJ as an autonomous source of obligations: today, any violation of art. 10
is considered as being a breach of Treaty obligations capable of leading to infringement
proceedings under article 226 TEU. This is also the case whenever the duty to inform the
Commission, imposed on Member States by article 10 EC, is breached: the Court considers it
a breach of the obligation of cooperation, imposed by article 5 of the Treaty, for a Member
State to refuse or neglect to provide the Commission with requested information or to fail
voluntarily to provide the Commission with the information which is necessary to control the
compliance of a Member State with Community law.

Although the term “good faith” is not used expressly and although the principle is applied in
this instance to the relationship between Member States and Community institutions, this
provision gives the principle of “good faith” a solid foundation in the Community acquis. It
enables a better understanding of the precise meaning given to this general obligation: a
requirement of loyal cooperation between Member States and willingness to honour their
commitments under the Treaty. Some academics have assimilated it to the German concept of
“Bundestrue” (“federal loyalty” or loyalty to the federal State). According to this analysis,
good faith would be an “illustration of the federal model and more precisely of Germany
where the concept must be understood as entailing not only a unilateral obligation on the part
of the Länder towards the central authorities but also as an allegiance to the federal principle
by both the Member States and the central government itself”. The necessity of cooperation
thus applies not only to States but also to relations between the institutions within the
European Union. If the term “good faith” is not always used explicitly, that of fairness - no
doubt because of its more objective connotation- is fundamental in Community law.

It represents the “emergence of moral values” in the Community system: “if freedom of
economic operators is the sine qua non condition of a market economy, it cannot however be
unlimited the ECJ points out that the freedom of action on the part of economic operators can
be measured by the awareness of their responsibility in the working of market forces: the
duty of loyalty must govern the behaviour of undertakings and ultimately benefit the
consumers”. The judge will only refrain from punishing the impairment to the free movement
of goods if the measures taken are justified by “the effectiveness of fiscal supervision, the
protection of public health, the fairness of commercial transactions, and the defence of the
consumer”. Fairness also appears as a principle regulating free competition: “any obstacle to
the freedom to undertake, which belongs to all undertakings, created by one of them, creates
an imbalance for its own profit and constitutes unfair conduct as it is detrimental to the entire
community. The notions of unfair competition and abuse of dominant position, considerably
developed throughout Community case law, are part of this trend. Aside from the Treaty
provisions, Community secondary legislation copiously refers to good faith and to fairness,
with the two concepts often interlinked.
These legal texts use the terms “abuse”, “abusive behaviour” to denote behaviour tainted with
bad faith. The concept of “good faith” is no longer defined by reference to its positive aspect
but by reference to its negative aspect: abuse of rights. This trend is clearly illustrated by

16
Council Directive 93/13/EEC of 5th April 1993 on unfair terms in consumer contracts which
provides in article 3, §1: “a contractual term shall be regarded as unfair, if contrary to the
requirement of good faith, it causes a significant imbalance in the parties’ rights and
obligations arising under the contract to the detriment of the consumer”. The very concept of
“good faith” as it is understood under the above Directive is clarified by the 17th recital of
the preamble: “Whereas the assessment, according to the general criteria chosen, of the unfair
character of terms, in particular in sale or supply of activities of a public nature providing
collective services which take account of solidarity among users, must be supplemented by a
means of making an overall evaluation of the different interests involved; whereas this
constitutes the requirement of good faith; whereas, in making an assessment of good faith,
particular regard shall be had to the strength of the bargaining positions of the parties,
whether the consumer had an inducement to agree to the term and whether the goods or
services were sold or supplied to the special order of the consumer; whereas the requirement
of good faith may be satisfied by the seller or supplier where he deals fairly and equitably
with the other party whose legitimate interests he has to take into account”.

As pointed out by M. CALAIS-AULOY, it seems that taken literally, the expression “good
faith” is used here in its subjective dimension, as a criterion which should be taken into
account in addition to the objective requirement of a significant imbalance. However, it
should be noted that when these texts were implemented by the Member States, the national
legislators were concerned that this subjective approach would lead to a weakening of the
measures taken against unfair contract terms; in order to avoid this risk they removed any
reference to the concept of good faith altogether. This was the case for article L132-1 of the
French Consumer Code. Even when the term “good faith” is not explicitly used, the word
“fairness” occasionally appears in secondary legislation Directive 97/7/EC of 20th May 1997
on the protection of consumers in respect of distance contracts sets out in its article 4.2 the
requirement that the consumer should be provided with information prior to the conclusion of
the contract. It is specified, in this respect that the information, “the commercial purpose of
which must be made clear, shall be provided in a clear and comprehensible manner, in any
way appropriate to the means of distance communication used, with due regard, in particular,
to the principles of good faith in commercial transactions and the principles governing the
protection of those who are unable, pursuant to the legislation of Member States, to give their
consent, such as minors”.

Using similar wording, Directive 86/653/EEC of 18th December 1986 on the coordination of
the laws of Member States relating to self-employed agents sets out in its article 3: “the
commercial agent must look after his principal’s interest and act dutifully and in good faith”.
This reference to good faith and dutiful behaviour (“loyalty” in the French version) also
appears in article 4 relating to the principal’s behaviour. Likewise, Directive 2002/65/EC of
23rd September 2002, concerning the distance marketing of consumer financial services,
provides in article 3.2: “ The information referred to in paragraph 1, the commercial purpose
of which must be made clear, shall be provided in a clear and comprehensible manner in any
way appropriate to the means of distance communication used, with due regard, in particular,
to the principle of good faith in commercial transactions and the principles governing the

17
protection of those who are unable, pursuant to the legislation of the Member States to give
their consent, such as minors”.

Finally, more recently, directive 2005/29/EC of 11th May 2005 concerning unfair business-
to-consumer commercial practices in the internal market, specifies in its article 2, that
“professional diligence” under the Directive means the “standard of special skill and care
which a trader may reasonably be expected to exercise towards consumers, commensurate
with honest market practice and/or the general principle of good faith in the trader’s field of
activity”. Those who commented on the Directive raised the issue of the definition to be
given to these two concepts (good faith and loyalty) in this context, in the following terms:
“if the concept of loyalty (“fairness”) is familiar to civil law systems, which include French
law, it is not in keeping with the free play of market forces encouraged by the EU… And
although English law may have inspired the economic approach adopted by directive
2005/29, the concept of “good faith” employed is unfamiliar to British jurists. It appears from
the analysis of the Acquis, including Acquis Communautaire, that the concept of good faith,
interpreted as a standard of behaviour, is frequently used. It is noteworthy that recent writings
by academics working on a European contract law suggest that the concept of good faith
should be given an essential role in contract law.

CHAPTER-VI

THE LANGUAGE OF GOOD FAITH IN INSURANCE LAW:

18
The expression “good faith” and its related expressions (ie “utmost good faith” and
“uberrimae fidei”) are used primarily in relation to the pre-contract disclosure obligations of
an insured and, post-contract, in respect of the obligation of an insured not to make fraudulent
claims. In both respects, language is being used loosely. For instance, disclosure obligations
can be breached innocently by an insured who is acting in good faith. And an obligation of
good faith which can only be breached by fraud might be thought to be ethically insipid.

DUTY OF UTMOST GOOD FAITH; AVOIDANCE AS A DISCRETIONARY

RIGHT:

Avoidance as a remedy is implicit from the word deemed in the MIA.

“The duty of utmost good faith is not contractual in nature, but derives from the rule of law.”
In S.17 MIA {Marine Insurance Act} 1906 a contract for marine insurance can be avoided
for breach of the utmost good faith. The definition of good faith has been condemned as
lacking fixed meaning because it is “lose and amorphous.” In CTI breach of S.17, 18(1) and
18(2) MIA 1906 which did not induce formation of the contract, was part of the question
whether to allow insurers to avoid. The courts paid more attention to the summary
presentation than to go back to pre-20th century case law and see how courts of the time dealt
with insurer's avoidance. According to the archives the courts had an open willingness to
avoid even the smallest of breaches the duty of utmost good faith. Namely that a ship had
become stranded and the broker does not take notice of the Lloyds list entry or that a policy
was overvalued or that goods are systematically undervalued to conceal that earlier policies
are more exhausted than they appear to be. All these are but some examples of where insurers
could easily avoid the marine policy for breach of duty. It’s no wonder that S.17 and S.18 (1)
MIA 1906 gives rise to such a readily available right to avoid.

The point is that anything not contemplated by the policy's specific wording was easily
avoided, if it materialised. For this reason the reference to materiality in the MIA 1906 is
supposed to be assessed if the policy itself was vague and not by virtue of the assureds' non-
disclosure. If the MIA 1906 is to be revised, the test for materiality should be left to instances
where the insurer avoids and there is some discrepancy between the event causing loss and
specific provisions in the policy. This will ultimately come about where there has been a
breach of the utmost good faith. Any situation to the contrary the assured ship-owner will
have to pay for the loss and either continue cover or seek cover elsewhere. If the insurer pays
I would argue that the insurer might have an equitable claim against the assured. The reason
for this being that the duty of utmost good faith creates a fiduciary type relationship.

Maybe a marine insurance policy is more similar to that of a trust or deed, given its nature
and strict adherence to its fiduciary like relationship.

UNLIMITED LIABILITY OF ASSUREDS:

A mutual club is where ship owners or ship operators as principles pool their resources to
insure against usual risk against third party liability. To the P and I market the duty of utmost

19
good faith gives rise to fiduciary type obligations and is the very basis on which business
ought to be conducted. If changes are to be made to the MIA the duty of good faith should be
retained.

Given insurers are agreeing to write risk that, on attachment, could give rise to a disastrous
claim. In a private firm (such as a sole proprietorship or general partnership) its owners,
partners, or stockholders accept personal and unlimited liability for its debts and obligations
in return for avoiding the double taxation of a limited company. Unlimited liability firms are
exempt from filing their annual accounts with a public authority (such as Registrar Of
Companies) unless they are subsidiaries of limited liability holding companies.
A circular from the UK Protection and Indemnity Club states that before 1996 all P and I
Club members risked unlimited liability. Post 1996 the circular suggested a compromise
position whereby a club member (ship-owner) would be liable to 20 per cent exposure of risk
which by many members was seen as being too high.

REFORM - DRAKE V PROVIDENT:

If one was to consider risk, then the assumption that the insured knows more than the insurer
stands valid by the duty of disclosure in case law. This may not hold so much nowadays
where this assumption is shifting especially with easier access of data via IT and through
knowledge and expertise in risk assessment. In these circumstances remedy has been blamed
as not flexible and severe, even in weak borderline cases, where avoidance for non-disclosure
being the only remedy.

The case of Drake Insurance v Provident Insurance indicates the need for more flexibility.
Lord Hobhouse's judgment in The Star Sea was considered by Lord Justice Rix where the
duty of good faith may be more flexible than only giving a party the right to avoid. His
statement was:
“The courts have consistently set their face against allowing the assureds duty of good faith
to be used by the insurer as an instrument for enabling himself to act in bad faith.”

Lord Hobhouse concluded in The Star Sea case that;

“Such authorities show that suitable caution should be exercised in making any extension to
the existing law on non-disclosure and that the courts should be on their guard against the use
of the principle of good faith to achieve results which are only questionably capable of being
reconciled with the mutual character of the obligation of good faith.”
Lord Justice Rix discussed the need of balancing rights and wrongs as a process not being
favoured by English Commercial Law, which merely concentrates in simple testing for
certainty. He proposed that in those cases where remedy is unfair, the insurer's right to avoid
should be limited by applying the doctrine of good faith. He also commented on
proportionality as a concept, but on the basis of giving wider effect to the good faith doctrine
seeing it as necessary by the wide spreading of consumer contracts. He said:
“In my opinion it would be consonant with these views that the doctrine of good faith should
be capable of limiting the insurer's right to avoid in circumstances where that remedy, which
has been described in recent years as draconian, would operate unfairly.”

The Drake case dealt with the non-disclosure of a speeding conviction as well as with
confusion between insured and insurer of the proper classification of a previous accident

20
which in actual fact was a no-fault accident. To that effect Lord Justice Rix commented on
the entitlement of the insurer to exercise his right to avoid the policy for non-disclosure:
“If, however, the point where a live one, I would hazard the opinion that knowledge or shut-
eye knowledge of the fact that the accident was a no fault accident would have made it a
matter of bad faith to avoid the policy,” And added:
“If it is right to allow that circumstances could arise where an insurer would not be in good
faith by acting on a prima facie right to avoid for non-disclosure, then the question would
have to be faced as to the conceptual analysis whereby an exercise of a right to avoid could
be invalidated by the insurer's bad faith. This is not an easy question.”

The general judicial recognition is that contract avoidance can operate badly against the
insured if in breach of the duty of good faith. To make the law fairer on the insured, it is said
that a less strict test of materiality should be adopted. In 1980 the Law Commission in its
non-disclosure and breach of warranty report recommended that “the test of materiality
should be whether, in the opinion of the reasonable assured, a fact known to him would
influence the judgment of a prudent insurer.” Similarly in Australia, the Insurance Contracts
Act of 1984 introduced a similar test, whereby matters known by the assured must be
disclosed, which either he has knowledge of their relevance in accepting the risk and its terms
by the insurer, or which in the circumstances a reasonable assured would be expected to
know as relevant in the said context. In cases of non-fraudulent non-disclosure, the insurer's
liability is reduced to reflect agreement made under proper disclosure.

REFORM AND HARMONISATION:

The doctrine of utmost good faith has its positive and negative points in that it is the one
feature that is shared among most contracts of insurance and that it lacks clear definition and
is based in an Act that is out-dated. However on the principle that there have been centuries
of case law constantly defining and redefining its meaning there are enough legal norms
derived by it to justify its retention. The Comité Maritime International (CMI) proposes
harmonisation in the area of marine insurance. Its guidelines address the notion of good faith
and propose some changes that are to “negate its negative effects”. Since the Law
commission has already published its draft Bill on consumer insurance law, could the MIA be
amended so as to fit with harmonising measures proposed by the CMI?

The Australian treasury has already conducted a comprehensive review of the MIA 1909 that
led to the Insurance Contracts Act 1984 (ICA). The ICA reformed the area of consumer
insurance law that included the duty of utmost good faith as an implied term in insurance
contracts. The main changes that were made included the abolition of warranties, insurable
interest and a shift of the burden on proof onto the assured. In S.54 of the ICA, an insurer
may not refuse to pay claims in certain circumstances. S.54 states:

(1) “Subject to this section, where the effect of a contract of insurance would, but for
this section, be that the insurer may refuse to pay a claim, either in whole or in part,
by reason of some act of the insured or of some other person, being an act that
occurred after the contract was entered into but not being an act in respect of which
subsection (2) applies, the insurer may not refuse to pay the claim by reason only of
that act but the insurer's liability in respect of the claim is reduced by the amount
that fairly represents the extent to which the insurer's interests were prejudiced as a
result of that act.”

21
 (2) “Subject to the succeeding provisions of this section, where the act could reasonably
be regarded as being capable of causing or contributing to a loss in respect of which
insurance cover is provided by the contract, the insurer may refuse to pay the
claim.”

ANALYSIS OF CARTER V BOEHM:

The general position was that the special facts upon which the contingent chance is to be
computed, like most commonly in the knowledge of the 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 risk, as if it did not exist. The keeping back
of such circumstance is a fraud, and therefore, the insurance policy is void on the ground of
the fraud and the principle of utmost good faith was introduced.

From the date of the origins of the doctrine, Lord Mansfield was careful to explain that the
duty of good faith was reciprocal. He opined that an insurance policy would equally be void,
against the underwriter, if he concealed the fact that he insured a ship on her voyage, which
he privately knew to have arrived. In such a case, an action would lie by the insured, to
recover the premium. Lord Mansfield went as far as to state that the governing principle of
“good faith” is applicable to “all contracts and dealings”

CHAPTER-VII

22
 DOCTRINE OF GOOD FAITH IN ENGLISH LAW:
Utmost good faith was not defined exhaustively, “it is enough that much more than an
absence of bad faith is required of both parties to all contracts of insurance”. It is nevertheless
clear, however, that the court was not prepared to countenance arguments that there were
shades of utmost good faith. Similarly, in Banque Keyser Ullman SA v. Skandia (UK)
Insurance Co. [1987] 1 Lloyd’s Rep. 69 at 93 (per Steyn J.): the duty is “not only to abstain
from bad faith but to observe in a positive sense the utmost good faith”.

This appeared to Good faith forbids either party by concealing what he privately knows, to
draw the other into a bargain, from his ignorance of that fact, and his believing the contrary.
Even so, during the 18th Century, the English Court placed limitations on the duty of
disclosure. Lord Mansfield expressly pointed out that the insured need not mention what the
underwriter knows or ought to know or, what he takes upon himself the knowledge of or,
what he waives being informed of. Neither need the underwriter be told of what lessens the
risk agreed and understood to be run by the express terms of the policy nor, to be told general
topics of speculation; for example, the underwriter is bound to know every cause which may
occasion natural perils such as the difficulty of the voyage, the types of weather; the
probability of lightening, hurricanes, earthquakes which may occur or, political perils which
may arise. In crystallising the duty of good faith, Lord Mansfield held that:
“The reason of the rule which obliges parties to disclose is to prevent fraud, and to
encourage good faith. It is adapted to such facts as vary the nature of the contract; which one
privately knows, and the other is ignorant of, and has no reason to suspect”

In consequence, it was clear that although the insured is under a duty to disclose material
facts to the insurer, he need not disclose facts which the insurer knows or is deemed to know.
This seems to be fair enough. From its earliest days, the duty of good faith in making
insurance contracts was a mutual obligation. It contemplated an active process of disclosure
and questioning between the insured and the insurer but, within sensible boundaries.

At the beginning of the 20th Century, the English Court was still saying that it:
“Good faith is an essential condition of the policy of insurance that the underwriters shall be
treated with good faith, not merely in reference to the inception of the risk, but in the steps
taken to carry out the contract” (Boulton v Houlder Bros & Co).”

With the codification of the Marine Insurance Act 1906, the principle found expression in ss
17 to 20: s 17 presents 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).
However, in English Law there are still some extant divergences with regard to the
understanding of utmost good faith in practice, since the test is founded on a hypothetical
situation and the scope of s 17 is still uncertain. A minimum standard that requires both the
buyer and seller in a transaction to act honestly toward each other and not mislead or
withhold critical information from one another. In the insurance market, the doctrine of
utmost good faith requires that the party seeking insurance discloses all relevant personal
information and the principle of utmost good faith is one of the key principles in marine
insurance law.

23
GOOD FAITH EXPECTED FROM BOTH THE PARTIES

Now, it is clear that an insurance contract is a contract of utmost good faith and therefore, the
contracting parties are placed under a special duty towards each other, not merely to refrain
from active misrepresentation but to make full disclosure of all material facts within their
knowledge. It is well known fact that there are two parties to an insurance contract named an
insurer and the insured; the insurer undertakes to pay a certain sum of money on the
occurrence of uncertain future event to the insured, who pays premium.
Good faith is expected from the insured or assured as well as the insurer. It is the insurer’s
duty to inform the insured of all the terms of the contract and conditions of the policy that is
going to be issued to the insured and must strictly conform to the statements in the prospectus
if any. However, it is generally the assured person on whom there is a bigger duty to disclose.
Most of the facts relating to health, habits, personal history, family history, etc., which form
the basis of the life insurance contract, are known only to the proposer. The insurer cannot
know them, if the insured does not disclose them. Similarly, in general insurance, an
inspection of the premises may not disclose that the contents of the godown have been
temporarily relocated. Non-disclosure of such facts would put the insurer as well as the
community of policy holders, at a disadvantage. It is therefore an implied condition or
principle of insurance that the insured or assured be required to make a full disclosure of all
materials particulars within his knowledge about the risk. 4 In Joel v. Law Union5, it has been
held that the duty to show good faith falls on the insured as well as the insurer to an equal
degree in all types of insurance contracts.

From the point of view of the insured, the principle of Utmost Good Faith could formally be
defined as "A positive duty to voluntarily disclose, accurately and Cully all facts material to
the subject matter being proposed, whether requested or not." The subject matter could be a
person, a house, a motorcar, old machinery being carried on a truck or even an oceangoing
vessel.

However, Utmost Good Faith is the duty to disclose full facts and is to be observed by both
the parties to an insurance contract, viz., and the insured as well as the insurer. The insurer
thus should not attempt to mislead the insuring public about the terms of the contracts and
scope of their cover." The prospectus and other documents issued, like the policy, should
carry a full and accurate disclosure of the terms of contract. Similarly, the proposer (one
seeking to buy an insurance policy) has to disclose everything that is relevant to the subject
matter of insurance.

In the case of the insured, the duty arises since the insurer thus has often to rely entirely on
the proposer for information. In many cases the insurer has no opportunity to inspect the
house or factory insured. Again, in all cases there may be some facts, which by their very
nature, are known only to the proposer. They can be known only when divulged by the latter.
4
United India Assurance Co. Ltd. V. MKJ Corpn. (1998) 92 Comp Cases 331 (333)
5
77 LKJB 1108

24
For example, information about one's property or person including one's health, habits,
personal history, family history, etc., are known only to the person taking insurance and
rarely are public knowledge. Yet, these issues are important for assessing the risk and
deciding the rate of premium to be charged. The insurance company can know most of these
facts only if the prospect comes forward to disclose them truthfully.

It may be argued that insurers could take steps to ascertain the facts. For example in property
insurance, the insurer could survey the property while in long-term insurance one can insist
on medical reports and special reports from a panel of doctors/specialists appointed by them.
The risk can be assessed accordingly.

However, the important point to note is that there may be certain aspects of health that may
not be easily detected in a routine medical examination. To illustrate, a person suffering from
hypertension or diabetes can manage to hide these facts if he were to appear for medical
examination after taking the appropriate medicines. Similarly it may not be easy to detect
past history of health and family history in a routine medical examination. In property
insurance it may not be feasible to examine each and every property being proposed for
insurance, and the hazards to which it is being exposed in minute detail.

It is for the above reasons that law subject’s insurance contracts to a higher obligation - Good
Faith Contracts become Utmost Good Faith contracts when it comes to insurance. The
proposer has to disclose everything that is relevant to the subject matter of insurance, as the
insurer knows nothing about them.

MATERIAL FACT
It is recognised duty of the insured to disclose all material facts which enable the insurer to
take his underwriting decision. It is difficult to determine the term ‘material fact’. What may
be material for one may be immaterial for the other and vice-versa. But, generally speaking, a
material fact is one which affects the judgement capacity of a person. It must be such that a
different consequence would have occurred had it not been disclosed. A fact is said to be
material, “if knowledge of it would have influenced a prudent insurer, either to refuse the risk
altogether, or to accept it only at a higher premium.” The duty to making disclosure is not
confined to such facts as are within the actual knowledge of the assured. It extent to all
material facts which he ought in the ordinary course of business to have known and he cannot
escape the consequence of not disclosing them on the ground that he did not know them.
Every circumstance that would have a bearing on the judgement of a prudent insurer in fixing
the premium or determining the acceptability of the proposal for insurance is a material fact.
Therefore, facts regarding age, height, weight, build; nature of occupation, smoking/drinking
habits, medical history, surgeries, earlier insurances, etc. must be disclosed.
In Marine Life Insurance Co. V. Ontario Metal Products 6, it has been observed that the test of
materiality is the judgement of the prudent insurer and it is not what material in the opinion
of a reasonable assured is.
6
94 LJPC 60

25
Similarly, in Reynolds v. Phoenix Assurance Co.7, it has been observed that the test whether
the circumstance in question would influence the prudent insurer and not whether it might
influence him. In Lindnan v. Desborough 8, it has been observed that the question is whether
any particular circumstance is in fact material and not whether the proposer believed it be so.

SCOPE OF DUTY OF DISCLOSURE BY THE PARTIES

1. The rule of good faith imposes the duty to make disclosure of all material facts about
which he knows are ought to know.
2. The utmost good faith rule requires revealing all relevant facts not only from the
insured but also from the insurer.
3. The duty of disclosure applies only to negotiations preceding the information of the
contract.
4. The duty of disclosure is deemed to have been cast on the insured when the insurer
specifically asks a question.

FACTS REQUIRED TO BE DISCLOSED

1. A fact which is earlier immaterial but becomes material later one must be disclosed if
it has been expressly mentioned in the terms and conditions of the policy. E.g. Fire
insurance of one’s house. Earlier, vacant plot located nearby. Later on a petrol pump
is constructed on such plot.
2. A fact which increases the risk must be disclosed in all circumstances. E.g. In case of
theft insurance, if a person lives alone in an isolated place, the same needs to be
compulsorily disclosed as it increases the risk.
3. Previous losses incurred and claims under previous policies needs to be disclosed.
This is mainly in case of double insurance where it needs to be ascertained as to
whether the subsequent insurance company is willing to insure and to what extent.
4. Special terms and conditions under previous policies if any.
5. Fact of existence of non-indemnity if to be disclosed. This relates to any charge or
encumbrance on the policy in the form of a loan security or otherwise.
6. The description of the subject matter must be stated properly. This is mainly to locate
the property if it is immovable and to recognize it if it is movable.
7. Facts which suggests any special motive to take the insurance.
8. Facts which suggests the existence of any moral hazards which relate to the moral
integrity of the proposer, etc.

FACTS WHICH NEED NOT BE DISCLOSED

1. Facts which the insured is not aware of.

7
(1978)2 Lloyds Rep 440
8
(1828) 8 B & C 586

26
 2. Facts of common knowledge, which everyone is supposed to know e.g. facts
regarding Government policies, taxes, subsidies, etc.
3. Facts of law like rules, regulations etc. which have already been made available to all.
4. Facts which a survey would have revealed.
5. Facts which could be reasonably discovered, by reference to previous policies and
records available with the insurers.
6. Facts lessening the risk need not be disclosed.
7. Superfluous facts or such information which is not logical.
8. Facts which are inferred information.
9. Facts which are within the knowledge of the insurers.
10. Facts waived by the insurer himself.
11. Facts governed by the policy itself.9

In Bhawani Bhai v. LIC of India10, it has been held that the insurer cannot avoid or repudiate
an insurance policy on the ground of non-disclosure of lapsed policies by the assured which
had no bearing on the risk taken by the insurer.

EXTENT OF THE DUTY OF DISCLOSURE

If the proposer has answered all the questions of proposal forms fully and correctly to the best
of his knowledge and belief, he has done his duty unless he has knowledge of some other
facts, which are material to the contract. The facts, on which no questions are asked, are
assumed that either the insurer considers them immaterial or waivers information thereon. In
defence of a non-disclosure, the proposer cannot say that he had omitted to disclose it by
carelessness or mistake or that he did not regard the matter as material. The duty of disclosure
comes to an end on the conclusion of the contract and the insured is not bound to disclose
such facts which came to his knowledge subsequently. In Glickman v. Lancashire Assurance
Company11, the assured made a proposal to insure his house against the fire. One of the
questions in the proposal form was- ‘Whether the house had been offered to insure
previously?’ the insured left the column unfilled. The policy was affected. When the claim
was lodged, it was found that the house was proposed twice but rejected. The insurer rejected
to pay as this fact was not furnished in response to the above question. If it has been held that,
it amounts to violation of the doctrine of utmost good faith and hence, the insurer is not
liable.

DISCLOSURE BY AGENT EFFECTING INSURANCE

Where insurance is effected fir the assured by an agent, the agent must disclose to the insurer-
(a) Every material circumstances which is known to himself, and an agent to insure is
deemed to know every circumstance which in the ordinary course of business ought to
be known by, or to have been communicated to him; and
9
LIC v. Shakuntalabai, AIR 1975 AP 68
10
AIR 1984 MP 126 (130)
11
1925 (2) KB 593

27
 (b) Every material circumstance which the assured is bound to disclose, unless it comes
to his knowledge too late to communicate it to the agent.

EFFECT OF NON-DISCLOSURE
The insurer believes all that is stated by the insured and the insured, being in a better position
to know about the subject matter of the contract is cast with a duty to disclose all material
facts. If he fails to disclose all material facts the question is- what is its effect on the validity
of the contract of insurance? The effect of mere non-disclosure does not amount to fraud. In
the case of all non-disclosures the insurer can avoid the contract and obviously be entitled to
avoid any payment of claims or monies under the policy. If it is found that the assured has
misrepresented any aspect of the risk, then the insurer would again obviously be entitled to
avoid any payment of claims or monies under the policy. However in certain cases of
misrepresentation, where the effect may only have been increased premium, it is possible that
the insurer may partly pay the claim. In a proposal for life insurance, the proposer (insured)
makes a declaration to the effect that all the statements in the proposed form are true in every
respect and if any untrue statement can be contained therein, the insurer would be entitled to
treat the contract as null and void and forfeit all the moneys paid therefore. The effect of this
declaration is to turn the representations in the proposal into warranties, which must be
complied in toto. However, the insurer’s right to cancel the contract is limited by the
provisions of Section 45 of the Insurance Act, 1938. This section stipulates that a policy
cannot be called in question after 2 years, on the grounds of inaccurate or false statements,
unless it is proved to be material and fraudulent.

The principle of utmost good faith is more favourable to the insurers as it is the assured who
has to generally make all the disclosures. This is primarily because when the doctrine was
evolved in the 18th century, the insurance market was in its infancy and thus requires
protection. Technological advancements have made it possible for both parties to see to it that
their interest is taken care of. But, there are several other grey areas to this doctrine as well.
There is still no clear cut distinction between as to what is material or immaterial and the
same is largely dependent on the whims of the insurers and the terms of contract. It is still
very easy for an insurer to repudiate the contract on the slightest point of non-disclosure by
treating them as warranties, thereby by putting the assured in an even more difficult position.
Another problem is with regards to as to what duration does the disclosures need to be made.
There is a clear indication in law. Thus, all these problems need to be taken care of and an
effective solution must be provided. Considering the principle of utmost good faith is one of
the most fundamental principles associated with the insurance law.

CHAPTER-VIII

IMPLICABILITY OF GOOD FAITH

28
Accordingly the English Courts, from a construction context (and indeed largely from a
contractual context) do not recognise any separate duty of good faith. Vinelott J said:
Although the courts will imply a duty to do whatever was necessary in order to enable a
contract to be carried out, the requirement of good faith has not been incorporated into
English law12.

To imply such a term at English law, the principles from the Australian case of BP Refinery
(Western Port) PTY Ltd v Hasting Shire Council13 must be followed:

(i) The term must be reasonable and efficacy;

(ii) The term must be necessary to give business efficacy to the contract, so that no
term will be implied if the contract is effective without it.
(iii) The term must be so obvious that “it goes without saying”;
(iv) The term must be capable of clearing expressions;
(v) The term must not contradict any expressed term of the contract.

To Vinelott J, the concept of good faith in English law was restricted, in construction
contracts, to the duty not to act fraudulently. Devlin J in the case of Mona Oil Equipment
Company v Rhodesia Railways14 was only prepared to go as far as co-operation and that co-
operation was limited or restricted to doing what is required under the contract:
“I can think of no terms that can properly be implied other than one based on the necessity of
co-operation. It is, no doubt, true that every business contract depends for its smooth
working on co-operation, but in the ordinary business contract and apart, of course, from
express terms, the law can enforce co-operation only in a limited degree to the extent that it
is necessary to make the contract workable. For any higher degree of co-operation the
parties must rely on the desire that both of them usually have that the business should get
done.”
The requirement to act in good faith is often seen as amounting to no more than an
“agreement to agree” which is unenforceable. Reference is often made to House of Lords’
decision in Walford and others v Miles and another.7 That case considered in the context of
lock out agreements whether the obligation to negotiate an agreement in good faith could be
implied. The House of Lords decided not only that an obligation to negotiate an agreement
was unenforceable, but also that an obligation to negotiate such an agreement in good faith
was similarly unenforceable.

GOOD FAITH IN CONTRACTS:

Lord Mustill, in his speech in Pan Atlantic Insurance Ltd v Pine Top Ltd 15 pointed out that
the celebrated decision of Lord Mansfield in Carter v Boehm which is so often identified as
12
London Borough of Merton v Leach (1986) 32 BLR 51
13
(1997) 52ALJR20
14
(1949) 1014
15
(2005) QSC 199.

29
the starting point for the doctrine on good faith in relation to insurance, applied the doctrine
to all contracts and not specifically to insurance. Lord Mustill observed that the general
principle (i.e. in relation to contracts generally) did not prevail but that marine insurance
continued to be treated as an exceptional case in which non-disclosure and misrepresentation
would ordinarily vitiate the contract even though they would not have had that effect at
common law.
So far as concerns the application to contracts in general, English law has not recognised a
good faith obligation save in the case of particular kinds of relationships such as fiduciary
relationships. This matter was discussed by Justice Finkelstein in Pacific Brands Sport and
Leisure Pty Ltd v Underworks Pty Ltd16. His Honour there referred to a paper by Professor
Goode on the subject “The Concept of Good Faith in English Law”, which explained that
English law takes the view that legal rights can be exercised regardless of motive. The
reason is said to be that, according to English principles of contract law, the predictability of
the legal outcome of a case is more important than justice, especially in a commercial setting.
As Justice Finkelstein noted, the House of Lords has recently reaffirmed this approach.

In the United States, an opposite position is taken 17. In Australia the law remains unsettled.
In Pacific Brands Justice Finkelstein pointed to a number of decisions in Australia, including
one or two of his own, which indicate a preference for the position taken in the United States
over the more traditional English approach. Citing the decision in Pacific Brands, Justice
Greenwood, in the Federal Court, recently indicated a preparedness “for interlocutory
purposes” to accept that a duty of good faith arose by implied term in a franchise agreement.

The Victorian Court of Appeal has recently had occasion to consider the question of an
implied duty of good faith in a commercial context, a joint venture agreement, in Esso
Australia Resources Pty Ltd v Southern Pacific Petroleum NL. Warren CJ referred to the
circular history of the development of the law relating to good faith and concluded that there
had been a clear recognition of the doctrine in Australia. But she was of the view that the
interests of certainty in contractual activity should be interfered with only when the
relationship between the parties is unbalanced and one party is at a substantial disadvantage
or is particularly vulnerable in the prevailing context. She said:
“Where commercial leviathans are contractually engaged, is difficult to see that a duty of
good faith will arise, leaving aside duties that might arise in a fiduciary relationship. If one
party to a contract is shrewder, more cunning and out manoeuvres the other contracting
party who did not suffer a disadvantage and who was not vulnerable, it is difficult to see why
the latter should have greater protection than that provided by the law of contract.”

A DUTY OF GOOD FAITH IN INSURANCE CONTRACTS:

So much for general commercial contracts. Our focus, for purposes of this conference is, of
course, upon insurance contracts. As Lord Mustill said, the good faith principle did not
survive beyond Lord Mansfield’s articulation in relation to general commercial contracts but
16
(2005) FCA 288 at para [61].
17
Justice Finkelstein’s discussion in Pacific Brands, supra at para. [62].

30
it did survive in relation to insurance contracts. Thus, in insurance, the doctrine enjoys at
least a 230 year pedigree. However:
“What was never clearly spelled out was how this result (application of a doctrine of good
faith to vitiate the insurance contract in cases of non- disclosure and misrepresentation) was
achieved. Various theories were advanced: that the policy failed for want of agreement on
the subject matter; that non-disclosure was constructive fraud; and that contracts of marine
insurance were subject to an implied condition precedent that there had been full and
accurate disclosure.”18

The importance of understanding and defining the legal derivation of the duty of good faith is
shown to us by Justice McMurdo’s analysis in Lomsargis. His Honour referred to the
observation of Badgery-Parker J in Gibson v Parkes District Hospital 19 that the duty of good
faith and fair dealing was seen not as contractual but as imposed by law once the parties had
entered into the relationship created by the contract.

This kind of thinking was at the core of the English position, as explained by Justice
McMurdo in his discussion of the English cases, that, since a breach of the duty of good faith
in relation to an insurance contract did not involve a breach of a term or implied term, there
was no remedy in damages but only a remedy by way of avoidance of the contract. (His
Honour, of course, had to consider the separate question whether there might be a tortious
liability and that is the subject of his Honour’s paper given earlier today). Although the good
faith obligation might have been understood to be mutual, avoidance as a remedy would
likely be of benefit only to an insurer, not to an insured. From an insured’s point of view, the
constraint upon excessive conduct under the contract by the insurer was doubtless the
doctrine’s chief advantage.

In Australian Associated Motor Insurers Ltd v Ellis & Anor 20 a comprehensive policy of
motor vehicle insurance contained a condition that the insured not make any modification to
the car without the insurer’s written consent. After the policy had been made and the policy
renewed, the insured modified the car by fitting it with “mag” wheels. The vehicle was
damaged whilst it was being driving by the insured’s 23 year old daughter. The wheels
played no part in causing the collision. Cox J, in the Supreme Court of South Australia;
found that the insurer was in breach of the implied duty found in s.13 because it had not
notified the insured of the consequence of breaching the condition.
CHAPTER – IX

LEGISLATIVE PROVISIONS

18
Lord Mustill, Pan Atlantic, supra
19
(1991) 26 NSWLR 9 at 17-18.
20
(1990) 6 ANZ Insurance Cases 60-957.

31
Section 17 of the Marine Insurance Act, 1906 confirms that the duty of utmost good faith
applies to both parties, and indicates the consequences of breach:
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.

Section 19 of Marine Insurance Act, 1963- Insurance is uberrimae fidei:

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.

Section 20 of Marine Insurance Act, 1963- Disclosure by assured:

(1) 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 be
assured, and the assured is deemed to know every circumstance which, in the ordinary
course of business, ought to be known to him. If the assured fails to make such
disclosure, the insurer may avoid the contract.
(2) Every circumstance is material if would influence the judgement of a prudent insurer
in fixing the premium, or determining whether he will take the risk.
(3) In the absence of inquiry the following circumstances need not be disclosed, namely-
(a) Any circumstance which diminishes the risk;
(b) Any circumstance which is known or presumed to be known to the insurer. The
insurer is presumed to know matters of common notoriety or knowledge, and
matters which an insurer in the ordinary course of his business as such ought to
know;
(c) Any circumstance as to which information is waived by the insurer;
(d) Any circumstance which it is superfluous to disclose by reason of any express or
implies warranty.
(4) Whether any particular circumstance, which is not disclosed, be material or not is, in
each case, a question of fact.
(5) The term ‘circumstance’ includes any communication made to, or information
received by, the assured.

Section 21 of the Marine Insurance Act 1963- Disclosure by agent effecting insurance:
Subject to the provisions of the preceding section as to circumstances which need not be
disclosed, where insurance is affected for the assured by an agent, the agent must disclose to
the insurer-
(a) Every material circumstance which is known to himself, and an agent to insure is
deemed to know every circumstance which in the ordinary course of business ought to
be known by, or to have been communicated to him; and

32
 (b) Every material circumstance which the assured is bound to disclose, unless it comes
to his knowledge too late to communicate it to the agent.

Section 45 of the Insurance Act, 1938- Policy not to be called in question on ground of
mis-statement after two years;

No policy of life insurance effected before the commencement of this Act shall after the
expiry of two years from the date of commencement of this Act and no policy of life
insurance effected after the coming into force of this Act shall, after the expiry calf two years
from the date on which it was effected be called in question by an insurer on the ground that
statement made in the proposal or in any report of a medical officer, or referee, or friend of
the insured, or in any other document leading to the issue of the policy, was inaccurate or
false, unless the insurer shows that such statement was on a material matter or suppressed
facts which it was material to disclose and that it was fraudulently made by the policy -holder
and that the policy-holder knew at the time of making it that the statement was false or that it
suppressed facts which it was material to disclose:

Provided that nothing in this section shall prevent the insurer from calling for proof of age at
any time if he is entitled to do so, and no policy shall be deemed to be called in question
merely because the terms of the policy are adjusted on subsequent proof that the age of the
life insured was incorrectly stated in the proposal.

CHAPTER – X

JUDICIAL ANALYSIS

33
 1. Carter v. Boehm21

Lord Mansfield laid down the principles of the rule of utmost good faith in the instant
case that “Insurance is a contract of speculation.... the special facts, upon which the
contingent chance is to be computed, like most commonly in the knowledge of the
insured only; the underwriter trusts to his representation, and proceeds upon
confidence that he does not keep back any circumstances in his knowledge, to mislead
the underwriter into a belief that the circumstance does not keep back any
circumstances in his knowledge, to mislead the underwriter into a belief that the
circumstance does not exists...... good faith forbids either party by concealing what he
privately knows, to draw the other into a bargain from his ignorance of that fact, and
his believing the contrary.”

2. Brownlie v. Campbell22

In this case, it has been observed that if one knows any circumstance at all which may
influence the underwriters opinion as to the risk he is incurring, there is an obligation
to disclose that which one knows and the concealment of any material circumstance
whether you thought of it as being material or not, avoids the policy.

3. LIC v. Shakuntalabai23

In this case the insured had failed to disclose that he suffered from indigestion for a
few days and took chooran from an ayurvedic doctor. He died within that year due to
jaundice. The insurer repudiated the claim on this account. The Court did not approve
of the repudiation as the insurer did not establish by clear and cogent evidence that the
question was properly explained to the insured and that he was told that illness
include such casual disturbances to health and medicines included tablets that could
be purchased at the nearest coffee stores.

4. P. Sarojam v. LIC of India24

Bench of the Kerala High Court observed that the insured had taken a policy on 20-9-
1973 and had died on 2-4-1974 of a heart attack. At the time of filling the proposal
form, as against the question as to whether he had at any time suffered disease of the

21
(1766) 97 ER 1162
22
(1880) 5 App Cas 925
23
AIR 1975 AP 68
24
AIR 1986 Ker 201, 1986 60 CompCas 445 Ker

34
 heart, answer given by him was in the negative and the Corporation was able to prove
in that case that the proposer was suffering from a serious heart ailment, and in that
context the Bench observed that a contract of insurance is uberrima fides and the
person seeking insurance is duty bound to disclose all material facts relating to the
risk involved in the policy of insurance. the Bench observed that "The duty of making
disclosure is not confined to such facts as are within the actual knowledge of the
assured and it extends to all material facts which he ought in the ordinary course of
business to have known, and he cannot escape the consequences of not disclosing
them on the ground that: he did not know them." The Kerala High Court therefore
came to the conclusion that the false answers to the question in the proposal form
given by the insurer relating to his health contract of insurance and the Corporation
was entitled to repudiate the policy and decline payment thereunder.

5. Ratan Lal and Anr. v. Metropolitan Insurance Co. Ltd.25

It is stated in this case that deceased Mahableshwar was suffering from kidney stones
and was being treated for a period of 4/5 months by doctor. The deceased eventually
came to die due to renal failure and consequent heart failure. The ailment the
deceased was suffering from cannot be treated as minor ailment because it eventually
contributed to his death. The fact that the deceased was suffering from kidney stones
was a fact which was to the exclusive knowledge of the deceased, and this fact would
not have been known, by ordinary prudence by doctor who might have examined him
on behalf of Corporation prior to the issue of policy. The non-disclosure of this fact
was a fraudulently suppression of relevant and material information by the deceased.
On account of the said non-disclosure or suppression of material information
regarding the health of the deceased, it has been held that the defendants were
certainly entitled to repudiate the policy in the manner done by them.

6. Life Insurance Corporation of India v. Smt. Asha Goel26

The Supreme Court has dealt with the scope of repudiation of claim of the insured or
nominee by the Corporation and has stated that the provisions of Section 45 of the
Insurance Act are of relevance in the matter. The Hon'ble Supreme Court has

25
AIR1959Pat413

26
AIR2001SC549

35
 observed that on a fair reading of the section, it is clear that it is restrictive in nature. It
lays down three conditions for applicability of the second part of the Section namely:
- (a) The statement must be on a material matter or must suppress facts which it was
material to disclose; (b) the suppression must be fraudulently made by the policy
holder: and (c) the policy holder must have known at the time of making the statement
that it was false or that it suppressed facts which it was material to disclose. Mere
inaccuracy of falsity in respect of some recitals or items in the proposal is not
sufficient. The Supreme Court again reiterated in this case the principle that the
burden of proof is on the insurer to establish these circumstances and unless the
insurer is able to do so there is no question of the policy being avoided on ground of
mis-statement of facts. The contracts of insurance including the contract of life
assurance are contracts uberrima fides and every fact of material must be disclosed.
Otherwise, there is good ground for rescission of the contract. The duty to disclose
material facts continues right up to the conclusion of the contract and also implies any
material alteration in the character of the risk which may take place between the
proposal and its acceptance. If there are any mis-statements or suppression of material
facts, the policy can be called in question. For determination of the question whether
there has been suppression of any material facts it may be necessary to also examine
whether the suppression relates to a fact which is in the exclusive knowledge of the
person intending to take the policy and it could not be ascertained by reasonable
enquiry by a prudent person.

7. Life Insurance Corporation of India v. Smt. G. M. Channabasemma27

Hon'ble Supreme Court has stated that it is well settled that a contract of insurance is
contract uberrima fides and there must be complete good faith on the part of the
assured. The assured is thus under a solemn obligation to make full disclosure of
material facts which may be relevant for the insurer to take into account while
deciding whether the proposal should be accepted or not. While making a disclosure
of the relevant facts, the duty of the insured to state them correctly cannot be diluted.

CHAPTER – IV

27
AIR 1991 SC 392

36
 CONCLUSION

Insurance contracts, however, are part of a special category of contracts, those classified as
uberrimae fidei, where parties do have that obligation towards one another. It can be said at
the outset that the word 'utmost' may add very little. It is the examination of 'good faith' that
goes to the heart of the concept. Material fact has been defined in one form as “any
information which may influence the judgement of a prudent insurer in deciding whether to
accept the risk, and if so, on what terms”. The definition of 'good faith' has many meanings in
the legal sense but in essence it encompasses notions of 'fairness, and reasonableness ... and
community standards of fairness, decency and reasonableness'. The duty of good faith
commences before the policy is made via the duty of disclosure, and continues so long as the
parties are in a contractual or continuing relationship with one another. The insurer was
bound to act with good faith towards the insured in relation to the granting or withholding of
consent to admissions or settlement of a claim, where the insured was conducting its own
third party litigation and not the insurer. Another thing is that if good faith imposes a standard
of fairness utmost good faith imposes a higher standard of fairness. The expansion of 'good
faith' as a concept may not simply bring insurance law within the general umbrella of the
good faith doctrine - it may rather make the burden of compliance with utmost good faith
more onerous - ie if good faith has more flesh put upon it as a touchstone in general contract
law and is expanded the standard of utmost good faith could become more extensive.

ANNEXURE

37
1. Law of Insurance -Dr. S. R. Myneni
2. Law of Insurance -Prof. M. N. Mishra
3. Law of Insurance -Murthy & Sharma
4. Law of Insurance -R. K. Nagarjun
5. Wikipedia
6. Google
7. [Link]
8. [Link]

38