Utmost Good Faith under English Insurance Law

Introduction

The Law of Insurance in England works based on the principle of “Uberrimae Fidei”, which is Latin term for the principle of “utmost good faith”. In this article, we are going to discuss the principle of utmost good faith under the English Insurance Law.

The synopsis of the article would be to first understand insurance contracts, the concept of utmost good faith, it’s relevance under English Insurance Law, recent developments in the field,  with the help of some case laws to widely understand the concept.

Insurance Contract

In the simplest form, an insurance contract is a contract between parties where one party, known as the insurer, accepts significant insurance risk from another party, known as the policyholder. On the happening of a specific event (insured event) which adversely affects the policyholder, the insurer compensates the policyholder,  in terms of monetary value.

For example, life insurance protects the loved ones of the policyholder by compensating them in terms of money for a living and their future.

Also, auto-insurances compensate for the damages of automobiles like cars, or any other vehicles in case it is damaged by any means.

However, for this trustful relationship between the insurer and the policyholder, a contract is an essential to give legal effect to their agreement. Insurance contracts are similar to other contracts where there is offer & acceptance, promise, consideration, agreement, lawful object, lawful purpose, legal capacity, etc.

Other than these, there are other essentials and principles of insurance contracts as well.

Terms related to Insurance Contract^[1]

1. Principle of Indemnity: As insurance contracts are mostly indemnity contracts, the principle of indemnity is also applied to it. It is to secure or give an upper-hand to the insurer, so that they only have to compensate the loss in terms of money, and that they pay no more than the actual loss suffered.
2. Non-indemnity contracts: These are generally life-insurance contracts where the value of loss of a life cannot be calculated or fixed. Therefore, premiums are paid by the policyholders according to the policy they select on a monthly, yearly, or like basis. In these cases, beneficiary names are provided who are to receive the money after their loss of life.
3. Principle of Subrogation: In case the damage or loss is caused by a third party, then this principle of Subrogation allows the insurer to sue that third party.
4. Doctrine of Adhesion: It is also a secured clause for the insurer where the insured or the policyholder states that they accept the entire insurance contract. This is added to the contract so that the insured does not get the opportunity to change the terms and the contract is not unfairly in their favor.
5. Doctrine of Waiver and Estoppel: Waiver is when someone waives their right. For example, a policyholder does not disclose a certain information while the making of the contract and the insurer doesn’t ask for such information either. Here, the insurer waives off their right to know that information.
   In the future, the insurer cannot claim the contract to be void or voidable because of the non-disclosure of that information. And this is estoppel. The insurer is bound to pay the claim due to estoppel of the insurance Contract.
6. The Doctrine of Good Faith: Also known as the doctrine of Uberrimae Fidei, or the doctrine of utmost good faith, is the principle of mutual faith and trust between the parties. In the case of an insurance contract, the mutual faith between the insurer and the insured.

The Doctrine of Uberrimae Fidei

This doctrine is based on the principle of highest honesty, fairness in partnership, and with the intention to never commit fraud with another person. The term “Uberrimae Fidei” is a Latin term meaning “utmost faith”, hence the Doctrine of Utmost good faith.

Under the English Insurance Law, the parties to an insurance contract must sign the contract with utmost good faith, and without any intention to deceive each other. This complete faith is achieved by full disclosure of every essential and true information by the insured to the insurer for the purpose of insurance.

The facts that need to be disclosed are^[2]:

1. The facts that increase the level of risks in the insurance, specially for an insurer
2. Any fact that has tendency to increase the probability of loss
3. Facts which shows any previous claims or previous loss
4. Any fact that can affect the subrogation rights of the insurer negatively
5. Facts showing the presence of any other policy for the policyholder

Some other facts are not needed to be disclosed such as facts of law, common knowledge, current affairs, facts which are clearly implied through other information provided by the insured, etc.

History of Good Faith

The principle of good faith and fair dealings emerged in the laws of the US in the mid-19^th century when the laws were contemporarily interpreted. Consequently, it was found that the express contracts were quite narrowly understood which gave one of the parties an upper-hand.

In the case of Kirke La Shellee Company v. Paul Armstrong Company et al.^[3], it was held that “every kind of contract has an implicit agreement to do fair dealing and practice good faith. That is, no party can do such an act as to deprive them of enjoying their rights and the consideration of their contract. Both the parties have to be faithful towards each other”.

However, before the introduction of Uniform Commercial Code in the 1950s, the common law of most of the states did not accept the implicit presence of good faith and fair dealings in every contract. On the other hand, states like the Commonwealth of Massachusetts followed this principle strictly. The violation of the principle of fair dealings and good faith by any party led to their liability of punitive damages, legal fees, etc.^[4]

The Doctrine of Good Faith under English Law

In English Law, the doctrine of Uberrimae Fidei is limited only to the insurance contracts or insurance policies.

In the landmark case of Carter v Boehm^[5] Lord Mansfield defined the duty of utmost good faith in insurance contracts. Lord Mansfield observed that, “an insurance contract is a deal based on speculation. The doctrine of good faith forbids any party to the insurance contract to gain advantage out of the other party for his ignorance of a fact”. He had also stated that the principle of good faith was applicable to “all contracts and dealings”.

Lord Hobhouse further pointed out in Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd^[6] the criticism of Lord Mansfield’s statement by Lord Mustill. That, “Lord Mustill had stated that Lord Mansfield was trying to incorporate a general concept of utmost good faith into the English Law. However, his efforts did not bring a big change, and was only futile and could only be incorporated in the insurance contract”.

Therefore, even after the observation of Lord Mansfield in the case of Carter v. Boehm that the doctrine of utmost good faith or the doctrine of Uberrimae Fidei was applicable on every kind of contract and dealings and both the parties are mutually liable to disclose every relevant information, it was overlooked by the English law and the doctrine of utmost good faith remained application to only insurance contracts. The Courts refused the recognition of the duty of good faith in Commercial contracts.

Provisions related to the Doctrine of Utmost Good Faith in English Law

The duty of fair dealings and good faith was first codified in the Marine Insurance Act, 1906 as under sections 18 to 20. This was done after the principle of utmost good faith and fair dealings were discussed in more than 2000 cases.

In 2015, the English Insurance Act repealed these sections and re-codified them. Under the English Insurance Act, 2015, the pre-contractual duty of utmost good faith is renamed as the ‘duty of fair presentation of the risk’^[7]. The Insurance Act also brought clarifications as to the confusion which was not solved by common law, i.e., the ‘knowledge of insurer and insured’ in relation to fair presentation of the risk. The 2015 Act further set out that non-compliance of utmost good faith will also lead to breach of contract. In other words,  non-disclosure by a party can also be a sole reason for a breach of contract. Hence, the same Act also provided for remedies for breach of contract.

In the case of CPC Group Ltd v Qatari Diar Real Estate Investment Company^[8], the Court as an attempt to describe the term “utmost good faith” stated that it is a general principle and that is  “a duty to adhere to the spirit of the contract, to observe reasonable commercial standards of fair dealing, and to be faithful to the agreed common purpose, and to act consistently with the justified expectations of the parties”.

In Bates v Post Office (No 3)^[9], the Court further have it a more wider and concrete meaning by stating that “the duty of good faith does not merely mean that the parties shall act in good faith but it imposes an obligation on both the parties to act honestly specially in the commercial context and with reference to the mutually decided duties and responsibilities by the contracting parties”.

Recent developments in Doctrine of Utmost Good Faith in English Insurance Law

In 2020, after the outbreak of the COVID-19 Pandemic, the UK government expressed their concern and issued a Guidance^[10], ‘strongly encouraging’ the contracting parties to ‘act responsibly and fairly in the national interest in performing and enforcing their contract’^[11]. On 30^th June, 2020, it was published that this Guidance would be in force indefinitely.

However, the Guidance clearly stated that this principle of good faith would not overrule or override any obligations or legal rights that the parties have agreed to expressly in their contract. 

Conclusion

In my view, the doctrine of utmost good faith or the doctrine of Uberrimae Fidei under the Insurance Law of England has seen a long time of changes and amendments and yet was not successful in making their own place as an essential of Contracts.

Further, the importance of the term “utmost” good faith is not to be ignored as it gives the doctrine or principle a pillar of necessity to be followed in insurance contracts. As insurance contracts are based on speculation, both the parties are necessarily required to disclose all the relevant information and practice the principle of “utmost” good faith.

Lastly, I think this principle needs a much better provision to back-up good interpretations of it which has been done in several cases. But at the same time, this doctrine has been seen to be used as a key to get out of a contract by the insurer on petty non-disclosure of any information by the insured, which results in injustice. Since, injustice is exactly the opposite the doctrine of good faith wants to serve, the English Law has still not been able to make it an absolute principle for Insurance Contracts.

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References:

^[1] Pooja Dave, How to Easily Understand Your Insurance Contract, Investopedia, (June 24, 2021), (Rev. Doretha Clemon), https://www.investopedia.com/articles/pf/06/insurancecontracts.asp.

^[2] Raslin Saluja, Application of the concept of “utmost good faith” in English Insurance Law, iPleaders, (Aug 2021), https://blog.ipleaders.in/application-concept-utmost-good-faith-english-insurance-law/.

^[3] Kirke La Shellee Company v. Paul Armstrong Company et al., 263 N.Y. 79 (1933).

^[4] Lucifer22, Good Faith and Application Of Uberrima Fides in Insurance and related contracts, Legal Service India

^[5] Carter v. Boehm, 3 Burr 1905, (1766).

^[6] Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd., 1 AC 469, (2003).

^[7] Gurses, O.,What does ‘utmost good faith’ mean? INSURANCE LAW JOURNAL, 27, 124-134, (2016).

^[8] CPC Group Ltd v Qatari Diar Real Estate Investment Company,  [2010] EWHC 1535 (Ch) at para [246].

^[9] Bates v Post Office (No 3), [2019] EWHC 606 (QB) at para [711].

^[10] Cabinet Office, UK, Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency, 7 May, (2020) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/883737/_Covid-19_and_Responsible_Contractual_Behaviour__web_final___7_May_.pdf.

^[11] COVID-19 and Duties of Good Faith Under English law, Dechert LLP, June 25 (2020).