Insurance is defined as "any contract whereby one party assumes the risk of an
uncertain event, which is not within his control, happening at a future time, in which
event the other party has an interest, and under which contract the first party is bound
to pay money or provide its equivalent if the uncertain event occurs."
The concept of insurance can be traced back many hundreds of years and it is widely
accepted that its origins lie within the Maritime sphere and its many associated risks,
including damage to and loss of both ships and cargo. Historical evidence suggests
that the fifteenth and sixteenth centuries saw major developments in this area as
merchant split such risks between them. During the seventeenth century, the Lloyd's
of London insurance market emerged. Originally, any disputes were settled outside of
the legal system but the courts eventually accepted jurisdiction over insurance
contracts in the eighteenth century and the law continued to develop via the doctrine
of judicial precedent.
In 1906, the common law was codified and placed on a statutory footing following the
enactment of the Marine Insurance Act 1906 (MIA 1906). The Act was intended to
provide certainty between those seeking insurance and those providing it. In codifying
the common law, it was hoped that clarity would prevail, bringing benefits for both
parties. Since then, the provisions of this statute have indeed been far reaching.
Originally drafted to deal with marine insurance, its influence soon spread into nonmarine
spheres as the principles of the Act were adopted in relation to various other
forms of insurance. Thus the statute not only deals with marine insurance, but as the
Law Commission have acknowledged, it "incorporates general principles of insurance
law and has been held to apply to all forms of insurance contracts, not simply to
marine insurance." It continues to influence worldwide insurance law today, indeed,
Cornah states that "It is difficult to over-estimate the influence of the MIA; many of
those countries that did not actually use it as a model for their own statutes have
adopted the standard Institute Clauses which are subtitled as being 'subject to English
Law and practice'." Its influence may now be in decline, however, following the
recent work of the Law Commission in this area. In order to consider the influence of
the MIA 1906, it is necessary to consider specific areas of commercial insurance.
The Marine Insurance Act 1906 and the Principle of Utmost Good Faith
If there is proof that the party insured was guilty of misrepresentation, fraud or
indeed, had simply failed to disclose certain matters, the insurer is legally entitled to
avoid the entire contract. Similarly, the insured is required to act in 'good faith.' The
requirement of good faith was famously explained in the case of Carter v Boehm
(1766). In that case, an insurance policy had been taken out on behalf of the governor
of Fort Marlborough - Carter, against loss of the fort to a foreign power. When the
fort was indeed taken by such a power, Boehm declined to indemnify Carter on the
basis that the weakness of the fort and the likelihood of it being attacked had not been
disclosed. The court held that the underwriter was in a better position than the
governor to assess the probability of the insured risk occurring and as such, Carter's
duty of good faith was discharged since he was not required to disclose facts which
the underwriter either knew or should have known about.
In the case, Lord Mansfield summed up the reasons behind the good faith requirement
as follows:
"Insurance is a contract based upon speculation. The special facts, upon which the
contingent chance is to be computed, lie most commonly in the knowledge of the
insured only; the underwriter trusts to his representation and proceeds upon the
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 risque as if it did not exist."
Thus, the position is such that if the actual risk differs from the intended one, the
contract of insurance will be void, even if the difference is not due to any fraud on the
part of the insured since the duty requires 'legal' rather than general good faith. The
MIA 1906 put this duty on a statutory footing and also increased the burden from that
of simple 'good' faith to that of the 'utmost good faith'. Under section 17 of the MIA
1906, insurance is based upon 'uberrimae fidei' - the principle of utmost good faith -
"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 18(1) of the Act states that "Subject to the provisions of this section, the
assured must disclose to the insurer, before the contract is concluded, every material
circumstance which is known to the assured, and the assured is deemed to know every
circumstance which, in the ordinary course of business, ought to be known by him. If
the assured fails to make such disclosure, the insurer may avoid the contract."
In Highlands Insurance Company v Continental Insurance [1987], Justice Steyn
stated that the provisions of the MIA 1906 in relation to utmost good faith apply to
marine, non-marine and reinsurance contracts and said
"I would add that the Marine Insurance Act, 1906, was a codification of the common
law; that the common law should be presumed to be the embodiment of common
sense; and that common sense rebels against the idea that there should be a difference
between marine and non-marine insurance in relation to non-disclosure and
misrepresentation." Similarly, the Law Commission have recognised the impact of
the MIA 1906 with the statement in their September 2006 paper on representation and
non-disclosure:
"Although the issues arise under a policy of non marine insurance it is convenient to
state them by reference to the Marine Insurance Act 1906 since it has been accepted
in argument, and is indeed laid down in several authorities, that in relevant respects
the common law relating to the two types of insurance is the same, and that the Act
embodies a partial codification of the common law." This provides yet further
confirmation of the far-reaching effects of the MIA 1906, outside the realm of marine
insurance.
The result of this part of the Act is that parties to the insurance contract must
volunteer all material information before the contract is finalised. If the insured fails
to disclose any material facts, the contract is avoided ab initio and will be treated as if
it never happened, with the parties being placed in their previous pre-contract
positions.
The very reason for the existence of the duty is so that both parties are clear upon the
terms under which they are contracting. As such, the key issue in terms of this duty of
utmost faith revolves around knowledge. In terms of the proposer, they need not
actually be aware that they are under a duty to disclose. The duty will still bind them
regardless and thus actual knowledge in this respect is therefore irrelevant. This
means that the proposer will be liable for all non-disclosure or concealment, be it
innocent or otherwise.
Another relevant issue is that of the proposer's opinion as to the nature of certain facts
- i.e. does it matter whether they consider them to be material or not? A proposer may
be surprised to learn that under the MIA 1906, their opinion regarding the material
nature or otherwise of any non-disclosed facts is irrelevant and will not therefore be
taken into consideration. Thus it does not matter if they did not think that the
particular facts were material. It is enough that the court considers them to be so.
An additional question in terms of knowledge arises in relation to things that the
proposer 'ought' to know and whether constructive knowledge equates to actual
knowledge. As seen above, under section 18(1) of the MIA 1906, the assured is
deemed to know everything which ought to be known by him. Case law on the matter
has been conflicting. In Joel v Law Union and Crown Insurance Company [1908] it
was stated that in view of the fact that the duty was to disclose, "you cannot disclose
what you don't know." In Pan Atlantic Insurance Company v Pine Top Insurance
Company [1994], the court had held that the insurance rule and general contract law
were one and the same but that changed with Economides v Commercial Union
Assurance plc [1997]. In that case, the insured had taken out a household contents
policy with the insurers in respect of contents to the value of £12,000. The insured's
parents later moved into his flat with various valuable items, whereupon the insured
increased his contents cover to £16,000. In fact, the items had an estimated value of
approximately £30,000 and when the flat was broken into, the insurers denied liability
on the basis of the insured's misrepresentation and his failure to disclose material
facts. On the facts, the court held that the insurers did have to indemnify the insured
since he had an honest belief in the replacement value of the goods being £16,000 and
the court accepted his argument that there was no actionable non-disclosure. Thus as
long as the insured is honest and has not wilfully ignored a material fact, then they
have discharged their duty.
In order to consider whether this is the case, it is necessary to determine what
amounts to a material fact. Under section 18(2) of the Act, everything that would
influence the judgment of a 'prudent insurer' when deciding upon a premium or
indeed, whether to accept the risk at all, is to be considered a material circumstance.
In Lambert v Co-operative Insurance Society [1975], it was held that this test laid
down in section 18 of the MIA 1906 applied to both marine and non-marine insurance
cases, as the Court of Appeal acknowledged the Act as a codification of the previous
common law, which had applied to both types of insurance.
Under section 18(3), in the absence of inquiry, certain circumstances do not have to
be disclosed. These are -
Under section 18(4), whether a circumstance is considered material or not is a matter
of fact in each case. As the decision is one for the 'prudent insurer,' the courts will
take evidence from other insurers as to the material nature of the particular fact in
question. Their opinions are merely evidence, however and need not be accepted, as
seen in Roselodge Ltd v Castle [1966] when an insurance expert gave evidence that
a proposer's adolescent act of stealing apples would be a material circumstance. The
judge refused to accept that this act alone, committed aged 17 would prevent the
insurer from granting insurance to the man when aged 67 and declared it an extreme
view.
The case of Pan Atlantic v Pine Top [1994] brought the concept of inducement into
the non-disclosure sphere when the House of Lords held that not only must the fact
have been material, it must also have induced the contract. In St Paul Fire Marine
Insurance Company Ltd v McDonnell Constructors Ltd [1995] the Court of Appeal
followed the dicta in Pan Atlantic that there was a factual presumption of inducement.
Following this case, if a fact is material, the court may presume that there was
inducement unless it can be shown otherwise.
The question has also arisen as to how far the duty of utmost good faith extends - i.e.
whether it is complete at the time the contract is made or whether it extends beyond
the conclusion of the contract. The answer can be found in the case of Manifest
Shipping Co. Ltd. v. Uni-Polaris Insurance Co. Ltd. and La Réunion Européene (The
Star Sea) [2001]. In this case, it was held that the duty of utmost good faith is a
continuing one and thus applies beyond the conclusion of the contract.
In terms of remedies for breach, there is no right to damages, as held by the Court of
Appeal in Banque Keyser Ullmann SA v Skandia (UK) Insurance Company Ltd.
[1990] due to the fact that there is no mention of damages in the MIA 1906 in
relation to the duty of utmost good faith. Again, the influence of the MIA 1906 can be
seen with the following quote from Slade LJ
"We think the clear inference from the Act of 1906 is that Parliament did not
contemplate that a breach of the obligation would give rise to a claim for damages ...
Otherwise it would surely have said so. It is not suggested that a remedy is available
in the case of non-marine policies which would not be available in the case of marine
policies."
The remedy available for a breach by either the insured or the insurer is avoidance of
the contract, which allows the party who is not in breach to avoid the entire policy.
This is often viewed as a harsh remedy, not least in cases where there has been an
innocent breach. Some have argued for reform in this area as seen in Kausar v Eagle
Star [1997], Longman LJ called for restraint -
"Avoidance for nondisclosure
is a drastic remedy. It enables the insurer to disclaim
liability after, and not before, he has discovered that the risk turns out to be a bad one;
it leaves the insurer without the protection which he thought he had contracted and
paid for... I do consider that there should be some restraint in the operation of the
doctrine."
If there is a breach of the duty of utmost good faith, the policy continues to remain
binding until it is avoided If it is not avoided within a reasonable period, after the
breach is discovered, the right to avoid will be lost altogether. This is because the
party who is not in breach will be treated as having affirmed the contract. Similarly,
the party who is not in breach may actually choose to affirm the contract once they
are aware of the breach and their right to avoid. Affirmation can be demonstrated
through words or conduct and it is a matter for the court to determine whether the
contract has in fact been affirmed.
In this area therefore, the impact of the MIA 1906 has been enormous, as it had the
effect of rendering all insurance contracts subject to the principle of utmost good
faith. The provisions of the Act in relation to this duty have been the subject of some
criticism, however. The Law Commission claims that the Act imposes "heavy duties
on those applying for insurance."24 The burden on the proposer will not be discharged
unless they have volunteered all information that would influence the underwriter's
risk assessment. If not, the insurance policy fails and any and all claims made under it
will necessarily fail.
The Marine Insurance Act 1906 and Warranties
According to Birds, a warranty in insurance law is essentially "a term involving a
promise by the insured that controls the risk run by the insurer." Unlike traditional
contract law, warranties in insurance law are considered to be a fundamental term of
the insurance contract rather than a more minor term. There are three types of
warranty which differ according to what the promise relates to. Warranties of opinion
involves the proposer warranting the truth of a particular fact to the best of his
knowledge. Warranties of past or present fact relate to facts that have or currently
exist. In comparison, promissory or continuing warranties relate to circumstances in
the future.
Warranties are covered in the MIA 1906 under section 33(1) where they are defined
as 'promissory' which means "a warranty by which the assured undertakes that some
particular thing shall or shall not be done, or that some condition shall be fulfilled, or
whereby he affirms or negatives the existence of a particular state of facts."26 Section
33(2) states that a warranty may be either express or implied.
Warranties, therefore, may be created in a variety of ways. The phrase 'warranty' may
be used to denote that the term should be considered as such but following CTN Cash
and Carry Ltd v General Accident Fire and Life Assurance Group plc [1989]27 this
may not be enough, as the court will consider the intention of the parties in
determining the exact nature of a term. Thus despite the use of the word itself, it may
not amount to a warranty if the court considers that that was not what the parties had
in mind. Similarly, just because the word 'warranty' is not employed, it does not
mean that a particular term does not have that effect, as it is always open to the court,
on a matter of construction, to determine that the term is indeed a warranty. The status
of a term is not always clear, however, especially when the courts themselves use
different terminology to describe the same term - for example, referring to a
'warranty' as a 'condition'. In addition, the fact that similar terms are not held to have
the same status is also a matter for confusion.
Under section 33(3) of the MIA 1906, if the warranty is not exactly complied with
then without express provision to the contrary, the insurer's liability is discharged
from the date of the breach. It is immaterial whether any breach relates to a loss, as
seen in De Hahn v Hartley (1786) when a warranty in the marine insurance policy
required a ship to sail with 50 hands or more. When the ship set off, there were only
46 hands on board but it docked six hours later and picked up 6 more. When the ship
was later lost, the insurers refused to pay and the courts agreed that there was no
liability, since the warranty had been breached. According to the principles of
freedom of contract, both parties had agreed to the warranty and the insurers were
therefore able to expect strict performance, despite the fact that the breach had
nothing to do with the later loss of the ship. Under section 34(2) of the MIA 1906,
once there has been a breach of warranty, it does not matter if that breach was
remedied prior to any loss being incurred since this is no defence.
The consequences of a breach under the MIA 1906 are therefore extremely serious
and reform has been recommended in this area by the Law Commission who have
stated that "The law on breach of warranty has the potential to cause considerable
unfairness to policyholders by allowing insurers to avoid paying claims for technical
reasons, which are unconnected with the loss that has occurred." It has long been
felt in many quarters that the Marine Insurance Act 1906 imposes too severe a penalty
in many cases, particularly when the breach is unrelated to the loss.
The House of Lords confirmed the strict nature of the rule in Bank of Nova Scotia v
Hellenic Mutual War Risks Association (Bermuda) Ltd, (The Good Luck) [1991] in
which it was held that compliance with the warranty is a pre-condition to the insurer's
liability thus, insurers can rely on any breach of warranty as a defence. In that case, a
warranty not to enter a prohibited area was breached by a ship owner and had the
effect of automatically ending the insurance under section 33 (3) of the MIA 1906.
Hare claims that "sections 33 and 34 reinforce the status of the warranty in English
law as the ultimate trump card in the insurer's hand. It has the effect of excusing an
insurer on account of any breach of warranty by the insured, causative or noncausative,
trivial or material. It is, potentially at least, the nuclear weapon of the
English marine insurance policy." The influence of this section and its potentially
harsh consequences however has gone beyond marine law and into the sphere of nonmarine
insurance contracts. The influence of the MIA 1906 can be seen in the nonmarine
insurance case of Hussain v Brown [1996] when the underwriters claimed
that an answer in the proposal form was a continuing warranty with regards to the
condition and status of a burglar alarm. The insurers stated that a breach of this
warranty therefore exempted them from liability. It was held at first instance that the
warranty related only to the state of affairs at the time that the form was signed and
did not provide a continuing warranty with regards to the future. This decision was
upheld on appeal.
The courts have, however found a way to mitigate the harsh effects of a breach of
warranty by adopting the contra proferentem rule in view of the fact that it is usually
the insurer who writes the terms of the contract. The application of the rule can be
seen in Provincial Insurance Company v Morgan [1933] when the insured answered
a question on a standard motor insurance policy stating that his lorry would be used to
carry coal. The insurers sought to repudiate liability after the lorry was damaged, on
the basis that it had carried timber as well as coal and therefore had breached the
continuing warranty that the vehicle would be used solely to carry coal. On the facts,
the court held that the wording used did not constitute a warranty and so the insurers
were unable to deny liability.
Thus in terms of influence in the area of warranties, the MIA 1906 has had a profound
effect in several ways. Firstly, its provisions have prevailed in terms of the meaning
of the term 'warranty' which differs from its use in general contract law, where it is a
minor rather than the fundamental term that it is in an insurance contract. In addition,
the statute's strict provisions in terms of breach have been held to apply to both
marine and non-marine insurance, which has led to criticism and calls for reform as a
result of its potential unfairness.
Conclusion
In conclusion, the impact of the MIA 1906 on the development of non-marine
insurance has been immense. Under section 17 of the MIA 1906, the principle of
'uberrimae fidei' - or utmost good faith applies to all insurance contracts. In addition,
Section 18 of the Act states ensures that all material circumstances must be disclosed.
The result of these sections is that parties to an insurance contract must volunteer all
material information, if the contract is not to be avoided ab initio. Both sections
therefore have far reaching effects in terms of insurance contracts.
Similarly, the MIA 1906 has also been a major influence in terms of warranties under
sections 33 and 34. The effect of these sections is that the insurer's liability is
discharged from the date of the breach, if the warranty is not complied with. This is
the case regardless of whether any breach actually relates to a loss. Again, the strict
nature of the law in this area has led to some harsh decisions but the courts have tried
to mitigate this on some occasions.
There can be no doubt, therefore that the impact of the MIA 1906 has been far from
benign and certainly, insurance law in terms of utmost good faith and warranties has
developed firmly under its shadow. Whether the MIA 1906 will continue to exert the
influence that it has previously done, however is another matter. As the Law
Commission stated in their recent consultation paper, "the 1906 Act is an impressive
piece of work: it covers much ground and is written in clear, forthright terms.
However, the courts have found it difficult to develop the principles of the codified
law or to adapt them to changing economic conditions. Although the nature of the
insurance market has changed markedly, insurance law remains much as it was a
hundred years ago." The Law Commission are just one of a number of bodies that
have called for reform in this area, not least to change some of the MIA's harsh
effects. In particular, calls have been made to end the situation whereby the insurer is
entitled to avoid a policy despite the fact that the insured has acted both honestly and
reasonably. Similarly, criticism has been made of the fact that an insurer is able to
repudiate a policy for breach of a warranty that is in no way material to the risk. The
review of these areas by the Law Commission is ongoing, so for the meantime the
influence of the MIA 1906 is set to continue.
