Duty of utmost good faith

Continuous Responsibility and Non-disclosure in Marine Insurance

Duty of Utmost Good Faith
Shipowner, freight forwarder or cargo owner to an insurance contract make statement of fact, belief, expectation to insurer before or at the time of a contract. The assured must disclose to the insurer every material circumstance before the contract is concluded . The provision of the Ordinancecontinues to stipulate that a material circumstance is one 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 . The result of non-disclosure of a material circumstance is that the contract may be avoided by the other party i.e. insurer because a contract of marine insurance is a contract based upon theutmost good faith . The consequence is very serious to an assured due to the fact that if the assured fails to make such disclosure, the insurer may avoid the contract ab initio i.e. from the time of inception of the contract . The issues arise are whether the duty of utmost good faith is a pre-contractual or post-contractual duty and how a breach may affect a claim in insurance contract. This papersummarizes recent studies and discussions on the issues.

Pre-contractual or post-contractual duty
The wording of s.17 of the Marine Insurance Ordinance does not limit the duty of utmost good faith only to pre-contractual situations and it is possible to interpret it as a continuing duty of disclosure throughout the duration of an insurance contract. The consequence of a breach of s.17 is clearthat the entire contract may be avoided to non-disclosure before and during the currency of the contract . However, such a remedy is inappropriate in the post-formation context when examined against the general purpose of the duty of disclosure in insurance law. The authority of a post-contractual duty of good faith was established in the case of The Litsion Pride and the implied term theory wasadopted as the juristic basis for the duty of good faith that applies to claims. This allows a flexible remedy for insurer to elect avoidance of the claim or avoidance of the policy ab initio .

In The Star Sea Lord Hobhouse firmly disapproved of the reasoning in The Litsion Pride that divorced the requirement of good faith from the provisions of s.17 and the remedy of avoidance. The conclusionarrived at by Lord Hobhouse in The Star Sea is based on the incompatibility of Hirst J.’s reasoning in The Litsion Pride and the decision of the Court of Appeal in Banque Financière de la Cité SA v Westgate Insurance Co . It has been observed that the availability of damages is not an inevitable result of the duty arising from an implied term. That would be the case if the term was promissory. Theimplied term could be a contingent condition precedent that permits the remedy of avoidance of the policy ab initio, but it could also be a term allowing the prospective discharge or avoidance of the claim.

Requirement of inducement
The meaning of pre-contractual utmost good faith was settled in Pan Atlantic Insurance plc v Pine Top Insurance , where the majority of the House of Lords heldthat it should be the broad, insurer-friendly test of what a prudent insurer would wish to know when assessing the risk or deciding the premium rather than the narrower, assured-friendly test that demands that the prudent insurer would have declined the risk or charged a higher premium . The Court then introduced an additional requirement into the law of utmost good faith and the majority wasinfluenced by the need to temper the harshness of the broad test for the issue of materiality. This additional requirement is that the misrepresented or non-disclosed fact must also have induced the actual insurer to enter into the contract. This was effected by reasoning that the inducement requirement for misrepresentation in general contract law must also be held to apply to misrepresentations in…