Jordan: The Duty Of Disclosure - Part 1 of 2

Introduction.

It is a fundamental principle of insurance law that the utmost good faith must be observed by each party. This rule was stated clearly by Lord Mansfield since 1766, when he said1that: "Insurance is a contract upon speculation. The special facts, upon which the contingent change is to be computed, lie more commonly in the knowledge of 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 risqué as if it did not exist. The keeping back of such a circumstance is a fraud and, therefore, the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived and the policy is void; because the risqué run is really different from the risqué understood and intended to be run at the time of agreement . . . The governing principle is applicable to all contracts and dealings. Good faith forbids either party by concealing what the privately knows, to draw the others into a bargain from his ignorance of that fact and his believing the contrary".

In 1879, Jessel M R said that2: "The first question to be decided is, what is the principle on which the court acts in setting aside contracts of assurance? As regards the general principal I am not prepared to lay down the law as making any difference is a substance between one contract of assurance and another. Whether it is life, or fire or marine insurance, I take it good faith is required in all cases, and though there may be certain circumstances from the peculiar nature of marine insurance which requires to be disclosed and which do not apply to other contracts of insurance, that is rather, in my opinion, an illustration of the application of the principle than a distinction in principles".

Also in 1928, Scrutton L J observed3 that: "It has been for centuries in England the law in connection with insurance of all sorts, marine, fire, life, guarantee and every kind of policy, that as the underwriter knows nothing and the man comes to him to ask him to insure knows everything it is the duty of the assured, the man who desires to have a policy, to make a full disclosure to the underwriter without being asked of all the material circumstances, because the underwriter knows nothing and the assured knows everything. That is expressed by saying that it is a contract of the utmost good faith - uberrina fides".

As far as marine insurance is concerned, the Marine Insurance Act 1906, Section 17, provides that: "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". It is the duty of parties to help each other to come to a right conclusion and not to hold each other at arms length in defence of their conflicting interests.4It is the duty of the assured not only to be honest and straightforward but also to make a full disclosure of all material facts.5 A failure to disclose, however, innocently, entitles the insurer to avoid this contract ab initio and, upon avoidance, it is deemed never to have existed.6

1.2 The duty of disclosure is not the same as that of representation.

Insurers can avoid insurance contracts if they were induced to enter into them by a misrepresentation of material facts made by the proposed which were false in material particular, whether the proposed acted negligently or quite innocently.7 This right differs little from that attaching generally in the law of contract.

Historically, misrepresentation in the strict sense has not been of particular importance in the insurance context. This is partly because the extreme width of the duty to disclose material facts has meant that often non-disclosure has subsumed questions of misrepresentation. Cases have frequently failed to distinguish between the two defences taken by an insurer and indeed it appears to be standard practice for an insurer, where possible, to plead both defences. While this may be conceptually unsatisfactory,8 Lord Mustill held that the rules relating to misrepresentation and non-disclosure at least as they affect materiality and subsequent avoidance, should be, and indeed always have been, the same.9 Whilst Lord Mustill's proposition may be a desirable one from a practical point of view, we would argue that the law may be wrong in theory, to assume that an undisputed principle of misrepresentation must necessarily apply to non-disclosure. Lord Mustill's judgement is based upon this assumption. This is not surprising if one considers that the rules relating to misrepresentation have been developed by the Courts of Equity, whilst non-disclosure is decidedly a creature of the common law.10 Furthermore, an innocent misrepresentation, on its true construction can never be an actionable non-disclosure - one is not held liable for not disclosing what one does not know and it is the representor's genuine belief in the truth of his statement that distinguishes the innocent misrepresentation from the fraudulent.11

Remedies also present a problem when misrepresentation and non-disclosure are treated as one and the same. Traditionally, the remedy for misrepresentation has always been recession, granted by the Courts of Equity. The common law gave no remedy for innocent misrepresentation although it always recognised fraud. The remedy for non-disclosure is a common law remedy. So now if misrepresentation and non-disclosure are the same creature, and is an equitable one, this automatic right to avoid the contract must become questionable. Will the judiciary be able to deny avoidance, even if materiality and inducement are proved, and insist instead that the innocent party settles for damages?12 Finally, it is not understandable why his Lordship held that inducement is required for non-disclosure as well as misrepresentation!13 This is absolutely novel in relation to non-disclosure, although not of course to misrepresentation - inducement has always been a requirement for misrepresentation, at least in the general law of contract. Also it is difficult to appreciate how an undisclosed fact is contrast to a misrepresented one can actually induce an insurer into making a contract. A misrepresented fact clearly can be an inducement, but to suggest that something the insurer has no idea of its existence, can actually induce him into making a contract seem, with respect, rather odd.14

1.3 Non-Disclosure.

The insured is under a duty to disclose all material facts relating to the insurance which he proposes to effect. In addition, he must make no misrepresentation regarding such facts. Usually, however, these duties are modified by the terms of the contract. The burden of proving that there has been a breach of duty on the part of the insured rests on the insurer.15

1.3.1 Disclosure by the Assured Himself.

Section 18(1) of the Marine Insurance Act 1906 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 failed to make such disclosure, the insurers may avoid the contract". The assured then must disclose all material facts which are within his actual or presumed knowledge.

1.3.2 Actual Knowledge.

It is the duty of the proposed assured to disclose to the insurers all material facts within his actual knowledge. The special facts distinguishing the proposed insurance are, as a general rule, unknown to the insurers who are not in a position to ascertain them. They lie, for the most part, solely within the knowledge of the proposed assured.16

Thus, Kennedy L J said that17: "No class of case occurs to my mind in which our law regards mere non-disclosure as invalidating the contract, except in the case of insurance. That is an exception which the law has wisely made in deference to the plain exigencies of this particular and most important class of transactions. The person seeking to insure may fairly be presumed to know all the circumstances which materially affected the risk, and, generally, is, as to some of them, the only person who has the knowledge; the underwriter, whom he asks to take the risk, cannot as a rule, know and rarely has either the time or the opportunity to learn by enquiry, circumstances which are or may be most material to the formation of his judgement as to this acceptance or rejection of the risk and as to the premium which he ought to require".

Further, in another case, Fletcher Moulton L J, remarked that18: "Insurers are thus in the highly favourable position that they are entitled not only to bona fides on the part of the applicant but also to full disclosure of all knowledge possessed by the applicant that is material to the risk".

Good faith, therefore, requires that he should not, by his silence, mislead the insurers into believing that the risk, as proposed, differs to their detriment from the risk which they will actually run.19 On the contrary, he should help them by all means in his power to estimate the risk at its proper value.20

The duty of disclosure requires that statements made by the proposer be that of facts not of opinion. A mis-stated opinion is actionable only if not given in good faith. However, the distinction between questions of fact and questions of opinion is not always an easy one, it may not matter greatly in practice.21 This point can be illustrated, particularly, by the example of proposals for life insurance, where a proposer may very well not know highly material facts regarding his health because he is not an expert or if he does not know something may very fail to appreciate its significance.22 In Joel v. Law Union and Crown Insurance Co.23 a statement as to the health of the proposer, made by him, was regarded as a statement of opinion. This accords with common sense, as the proposer who is not a medical expert, or was not told specifically by such an expert of facts as to his health, cannot be expected to give more than an opinion. However, in a later case24 concerning a similar issue, a proposer who failed to disclose a visit to a specialist was held to be guilty of non-disclosure of material fact, even though he did not know that there was anything seriously wrong with him. Thus, although a mere statement as to health without more information, is a statement of opinion, at least where the proposer does not know any relevant facts. If a proposer for life insurance has consulted a doctor in more than an ordinary way, the fact of consultation will almost certainly be a material fact requiring disclosure.

A failure on the part of the assured to disclose a material fact is sometimes called concealment.25 Strictly speaking, the word implies the keeping back or suppression of something which is the duty of the assured to bring specifically to the notice of the insurers,26 and not merely and inadvertent omission to disclose it. Hence, when the failure to disclose is not due to design and the assured has no intention to deal otherwise than frankly and fairly with the insurers, the term "non-disclosure" may perhaps be more appropriate. Every contract of insurance proceeds on the basis that the duty of disclosure has been discharged by the proposed assured. The failure to discharge such a duty, renders the contract voidable at the instance of the insurers.27

1.3.3 Constructive Knowledge.

When the Marine Insurance Act 1906 applies, the proposer is fixed with constructive knowledge under Section 18(1) which states that: "The assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him". This is clearly the rule for marine insurance;28 does it apply to other kinds of insurance contract? In general, the rules of non-disclosure apply equally to marine and to non-marine insurance.29

Clearly, the assured is not bound to disclose what he does not know and some cases, particularly, in the life insurance field, have assumed that only actual knowledge imposes no duty.30

In Joel v. Law Union and Crown Insurance Co.31an issue was pointed out over whether the proposer was bound to disclose the fact that she had suffered from acute depression, it being accepted that she was unaware of that fact. This argument was rejected by the court and the judges were at pains to point out that there is no duty to disclose what the proposer does not know.32 However, it has later been said that the question as to the disclosure of constructive knowledge is an open one, so far as non-marine insurance is concerned.33 It is arguable that a proposer is under a duty to disclose what he constructively knows because that is the law in respect of marine insurance. Section 18 of the 1906 Act, which so provides, is merely a codification of the duty of disclosure in respect of marine insurance which reflects the common law rules in respect of all classes of insurance.34 More recent cases, especially Pan Atlantic Insurance Co. v. Pine Top Insurance Co.35 assume in respect of other aspects of the duty of disclosure, that Section 18 merely codified the common law applying to all insurance. It is in cases of life policies that actual knowledge only has been required. This is not altogether surprising, given the difficulties faced by the average proposer with regard to knowledge of his state of health. Perhaps the simple and most logical solution would be to treat life cases as sui generis. Moving backward, the line between actual and constructive knowledge is not clear; one may be aware of a fact, yet not appreciate its significance. The obvious examples is that the proposer may know a fact but not know that it is material to the risk. Apart from this example, it seems that current law consider the proposer to know facts he may not actually know in the following cases:

  1. Facts known to his agents;
  2. Facts he has taken to know from his own experience as a human being, whether as 'a man in the street' or a man of affairs;
  3. Inferential knowledge: conclusion which he should have drawn from information he has or should have.36

1.3.2.1 The Knowledge of Agents.

The proposer is assumed to have the knowledge of his "agent to know".37 In marine insurance it is not the knowledge of all agents and servant that is imputed to the proposer of marine insurance, but only the knowledge of the master or the shipowner, or, to use Lord Halsbury's phrase "his general agent for the management of his shipping business".38

Applying the general law of agency in a non-marine case, Pearson J said that39: "One should consider, mainly at any rate (i) the position of the agent in relation to the principal and whether the agent had a wide or narrow sphere of operation and (ii) the position of the agent in relation to the relevant transaction and whether he represented the principal in respect of that transaction".40

1.3.2.2 The Knowledge of Experience.

The law makes some assumptions about what the proposer knew or should have known himself. It is likely that what the law expects of the commercial proposers, is greater than what is expects of the consumer or of a man in the street. Beyond this the duty of knowledge is objectively assessed: if the proposer has conducted an investigation leading to knowledge of the risk greater than what would normally be expected of him, and the insurer is unaware of this investigation and its findings, it is doubtful whether the proposer must disclose them to the insurer. The law is normally reluctant to reward diligence with the crown of heavier duties than those generally imposed on the reasonable man in his position, lest it discourage the voluntary investigation of risks, the result of which might be useful.41 The businessman who proposed insurance will be assumed to know what is usually known by a businessman of that kind. However, current commercial standards do not require proposers to conduct a special investigation of, for example, security in his business,42 unless and to the extent specifically demanded by the insurers, any more than current standards expect a consumer to initiate himself a medical examination before applying for life accident insurance.

In one case43 the plaintiff assured was an insurer with separate departments for underwriting and for re-insurance. When the Lloyd's casualty list came, as usual, to the underwriting department, which was busy, it was put in a drawer. The list contained information material to a risk which was re-insured by a broker for the re-insurance department, was unaware of the information, that afternoon. The Court of Appeal held that the plaintiff should be deemed to know the information. According to Lord Steendate M R it was stated that 44: "if it were a question of their having done their best, so far as the pressure of business would allow, to make themselves acquainted with the casualty slips, and of there not being able to do so in time to stop the broker's instruction, I think it might have been difficult to deal with such a case, but there is no such case before us. They never did anything at all".

1.3.2.4 Inference - Fact or Fear?

The law looks first to the facts that the proposer actually knows or ought to know, his primary knowledge. But then the law also takes him to know what the reasonable man would infer from his primary knowledge.45

The proposer is required to disclose material facts. In principle, he may distinguish matters of opinion. At one time the proposer did not have to mention opinions, at least opinions or facts known to the insurer. And, since men differ in their reason over the same material facts, they are not required to give conclusions to another. However, whether the opinion is rumour, report or moonshine, the only question in law is whether it is material to the risk. Rumours and opinions are facts about what people are saying or thinking, if they might influence the prudent insurers, they must be disclosed.46

In Godfrey v. Britannic47 the assured was told by his doctor that he had a kidney complaint and that he could return to work if he took care. Roskill J said that48: "I cannot think that a reasonable man, with no specialist knowledge of any kind, could have failed to appreciate that he was possessed of knowledge and information relating to his health". However, it is doubtful whether a proposer must mention routine visits for a check-up. He must disclose only if there was "something that should have stuck in his mind and was quite different from the ordinary routine visits that one makes to an eye surgeon when he examines a patient and perhaps prescribes altered lenses".49

1.4 The Test of Materiality.

The proposer must disclose what he knows or can be assumed to know what is material to the risk. What is material is decided by reference to the judgement of the prudent insurer. Some facts are more important than others and there remains this question: How great must be the potential influence on the assessment of risk of the undisclosed fact, if the insurer is to be allowed to avoid the contract? Before we answer this question, it seems worth explaining the position in Scotland regarding the reference to the prudent insurer.

1.4.1 The Position in Scotland.

It is true that both in England and Scotland, a positive duty to disclose material facts is laid on both parties to an insurance contract.50 It is also true, that the same test for ascertaining the materiality or, otherwise, of an undisclosed fact is applied in both countries to all types of insurance, except to life insurance in Scotland.

At the end of 1992, English Law achieved equivalence of treatment between marine & non-marine indemnity and life cover. Indeed, that the test of reasonable insurer should be applied to all contract, would seem to be a logical conclusion consistent with an often expressed belief that the Marine Insurance Act 1906 was "a codification of the common law".51 There is certainly many cases before the 1906 Act which has been taken to adopt the reasonable insurers test.52 This test has not yet been applied in Scotland as a focal point in the context of non-marine indemnity contracts. While the legislation pointed in the direction of the reasonable insurers test, the authoritative judgement of the First Division in the Inner House of the Court of Session when dealing with life insurance cases, pointed the other way.53 Moreover, if the Marine Insurance Act 1906 did not act as a focal point, it was certainly arguable that this case did and that it prescribed the general test of materiality.54 Recently, the Second Division in Samuel Hooper case 55 had to explain why the test for indemnity contracts should differ from that of life cover. All of the judges adopted the same position. The critical point of distinction was that the knowledge elicited from the insured could only be subjective in the context of life insurance, but could be objectively ascertained in the indemnity context. Moreover, it would be unfair to expect the insured to disclose information when the significance of which to an insurer could not be expected reasonably to be appreciated. As Lord Kirkwood put it "if the reasonable or prudent insurers test was applied then it would be open to the insurers to contend that had they known of the existence of the symptom in the light of the medical advice available to them, they would not have to accept the risk and that they were therefore entitled to treat the policy as void".56 The test of materiality in non-life cases was, therefore, declared to be the same as the test applied in England to such cases.57

The proposal form in life insurance cover contains two types of questions. Specific questions which the answers depend on the insured knowledge and general questions which depends only on the true and honest opinion from the insured. Whether a question specifically asks for the insured's opinion or can only be answered by stating an opinion, it is submitted that there is no need to introduce any reference to the test of materiality.58 The test of materiality only becomes relevant when the issue before the Court is non-disclosure or misrepresentation of a known fact which is known only to the insured.

Furthermore, Professor Forte observed that there is no difference between the questions: have you seen your doctor in the last five years? and have you convicted a road traffic offence in the same period? In both, the insurer has to rely on the personal knowledge of the insured and go further in saying that there is no need to appeal to justice or fairness where rules of law already protect an insured who either does not know or can only be expected to opine about certain facts.59

The practice in the long-term insurance practice and the general insurance practice for indemnity contracts provides for such a warning. "All material facts must be disclosed. Failure to do so could invalidate the policy. A material fact is one which would be likely to influence an insurer in the assessment or acceptance of the risk . . . if in doubt as to whether a fact is material then it should be disclosed to the insurer". This warning is as much a definition of the appropriate test of materiality as that stated in the Marine Insurance Act 1906.60 Thus, if this logic is acceptable to be applied on the reasonable insurers test in cases of indemnity contracts,61 there is no reason why it should not also be acceptable for life cover since the statement of long-term insurance practice provided that a proposal form for life cover should do the following (a) call for disclosure of material facts; (b) warn what the consequences of failure to disclose such facts will be; (c) define "material facts" as these which "an insurer would regard as likely to influence the assessment and acceptance of a proposal"; and (d) warn that if the insured has any doubts about the materiality of a fact then it should be disclosed.62

Furthermore, the preferring of the reasonable insurers test could be justified on the grounds that reasonable insured tests are more difficult to apply than the former one. Because the materiality is a question of fact to be determined by the Court, it can be assisted in that by the expert evidence of reasonable underwriters. (How can a Court know or ascertain the state of mind of a reasonable person in relation to deciding if a fact would influence an insurer).63 However, when a fact speaks of its own materiality, there is no need to return to either test, so there is no need for recourse to expert testimony. (Such as the situation where a person after testing for AIDS, which shows to be positive.)64

1.4.2 The Definitions of Material Facts.

Material facts have been statutorily defined on two occasions: The Marine Insurance Act 1906, Section 18(2), provides: "Every circumstance is material which would influence the judgement of a prudent underwriter in fixing the premium or determining whether he will take the risk". The Road Traffic Act 1934, Section 10(5), reads: "The expression 'material' means of such a nature as to influence the judgement of a prudent insurer in determining whether he will take the risk, and, if so, at what premium and on what conditions".

The similarity in the definitions can readily be seen and both can be traced to their parent, Lord Mansfield, in his judgement in Carter v. Boehm.65 The common factor is that the insurer or underwriter alone determines what is material.

From an underwriting point of view, material facts might be classified as first, tangible, and secondly, intangible, i.e. that group of facts which give the background to the moral character, the reputation for integrity... etc, of an insured.66

Of the first group, there are innumerable cases. An omission to state that adjoining property had been damaged by fire, that the fire had been extinguished but it was feared it would break out again, should be considered as to constitute non-disclosure of a material fact.67 Where a motor car is insured against fire, the structure and situation of the garage are material facts affecting the possibility of a fire breaking out and of its being extinguished.68 However, it may safely be said, any fact, which affects the material is considered as a material fact.

But these are not the only facts which an underwriter requires to know before he can assess the risk. It has many times been stated that what is insured is not property but the interest in property. Thus, Jessel M R observed that69: "The word 'property' as used in several of the conditions (in the policy) means not the actual chattel, but the interest of the assured therein".

Once this is accepted, the necessary corollary is that the insurance contract is a personal contract between the insurers and the insured for the payment of a sum of money.70 Its purpose is not to insure the safety of any particular object, but to insure the insured against loss arising out of his relationship with the subject matter of the insurance. This issue of the personal nature of a contract brings into operation an assessment of what is known as moral hazard. Some underwriters regard moral hazard as being of greater importance than the physical hazard, and clearly there is ample scope for a wide variation of opinion. Thus, a history of previous fire or burglary losses, or a record of claims, will rightly put an underwriter on his guard.71 Further, the fact that a proposal for insurance was declined, or renewal refused, would be properly regarded as material.72 In the case of a loss of profits insurance, the fact that a proposer is trading at a loss is one which ought to be disclosed.73

1.4.3 The Four Degrees of Influence.

Section 18(2) of the Marine Insurance Act 1906 provides that a fact is material if it "would influence the judgement of a prudent insurer . . ." This rule applies also to non-marine insurance.74 The reference in Section 18(1) to influence, does not tell us the degree of influence that is required. There are, broadly speaking, four possibilities: (i) information type A which is so material that, if the insurer had known it, he would have refused to make the contract at all, or he would have responded by further investigation leading to refusal. In England, for example, Blackburn J said that75: " the excessive valuation was material, for it "not only may lead to suspicion of foul play, but . . . has a direct tendency to make the assured less careful"; (ii) information type B is such that, if the insurer had known of it, he would still have made the contract of insurance but only on terms, especially as to premium, different from those he did make, or he would have responded with further investigation leading to insurance on different terms. Some support for this view can be found in England in early cases.76 More recent support is found in Beger Ltd. v. Pollock77 where the non-disclosure of certain information was held immaterial because the judge was, as he noted: "far from satisfied that, if the undisclosed matters had been fully reported and explained to these underwriters, they would in fact have declined to accept this declaration under open cover or have sought to vary its terms or to require an increased rate of premium; (iii) information type C is such that, if the insurer had known of it, he would have considered it relevant but not so material that he would have refused the contract or insisted on different terms. It would have "affected his judgement perhaps by reinforcing it - it was information which, together with other facts, had they been present, would have produced a different contract, but, considered alone, made no difference to the particular contract or its terms. This was the type of information which was accepted by the Court of Appeal,78 which is consider it as moving English Law in the direction proposed by the Law Commission.79 It is very doubtful that the Court of Appeal thought it was moving the law at all. On the contrary, one of the bases of the decision was a desire to respect the Court's view of precedent.80 In reality, it will be contended that the Court has moved the law away from precedent, away from principle and, if the Law Commission was indeed concerned, as it appears, to protect the assured, away from the interests of the assured. This decision has been "met with almost universal concern and disappointment";81 (v) information type D might be placed between type B and type C. In Missouri, for example, the test of materiality is whether if stated truthfully, the answer might reasonably influence an insurer to reject a risk or charge a higher premium; the words 'might reasonably influence' do not mean 'would reasonably influence'. In England, some years earlier, the Law Reform Committee stated the law in similar terms.82 Since they stated that the practical effect of the law relating to non-disclosure was that the insurers were entitled to repudiate liability whenever they could show that a fact within the knowledge of the insured was not disclosed which, according to current insurance practice, would have affected the judgement of the risk.83

The Report then continued that: "Whether the insuring public at large is aware of this it is difficult to say, but it seems to us to follow from the accepted definition of materiality that a fact may be material to insurers, in the light of great volume of experience of claims available to them, which would not appear to a proposer, for instance, however honest and careful, to be one which he ought to disclose".84

As a result type D appears to be information such that it might be classed as information type B or as type C, because the evidence from the market is that some prudent insurers would have insisted on different terms but some would not: market practice is not decision that the information was material and should have been disclosed.85

The last major case, before Pan Atlantic,86 to be decided in this area was CTI v. Oceanus Mutual Underwriting Association (Bermuda) Ltd.87 There, the Court of Appeal decided that it did not have to be shown that the misrepresented or non-disclosed fact had had a 'decisive influence' on the mind of the insurer, in the sense that he would have acted differently if he had known the true facts, it was enough to prove that a prudent insurer would 'have wished to know' the facts when making his assessment of the risk. The decision of the Court of Appeal in this case was built on a wrong understanding of Lord Mansfield's statement in Carter v. Boehm,88 which could be summarised by saying that the underwriter must rely on the insured for all necessary information and must trust to him that he will conceal nothing so as to make him form a wrong estimate. If a mistake happened, without any fraudulent intention, still the contract is annulled, because the risk is not the same as that which the underwriter intended.

There are here two forces at work. The first, which is expressed by the principle that an insurance contract is a contract of the utmost good faith, derives from the need to discipline the assured or his broker to put all their cards on the table and not to hold any "material" information back on the pretext that it would not make any difference.89 The second is the principle that an insurer ought to be entitled to avoid his obligations as a matter of right if and only if he can come before a Court and say that: "This was not the bargain which I made when I accepted the risk at the premium which I fixed. If I had known what I now know, I would have acted differently. I would either have declined the risk altogether or I would have charged a higher premium. At all events, the agreement would have been different from the agreement which I in fact made in ignorance of what I now know".90

In their judgement in CTI the Court of Appeal seem to have been aware of these tensions which are probably, in the last resort, irreconcilable. At all events, they have preferred to adopt the "discipline on the insured" basis for the rule, regardless of the fact that this approach could work serious injustice in cases where the insurers cannot show that the addition of the extra information, over and above what he already possessed, would have made any practical difference to an assessment of the risk either in his own mind or, more importantly, in the mind of the prudent insurer".91

Many saw Pan Atlantic as an opportunity for the House of Lords to set the Law of Insurance back on the right track on the issue of materiality; their Lordships, on a bare majority, rejected the opportunity and approved the CTI decision.

The relevant facts of Pan Atlantic can be dealt with briefly. Pan Atlantic reinsured the excess of loss on their direct American liability insurance with insurers other than Pine Top between 1977 and 1982. They reinsured this business with Pine Top during 1980 and 1981. In 1981, on renewal, Pan Atlantic's brokers met with the reinsurers and suggested a lower premium. Their appalling risk record, on a certain type of business, and the losses actually sustained in 1981, were misrepresented to Pine Top, by approximately $20,000. During 1982 the losses were again disastrous and, as the previous facts had by now come to light, Pine Top sought to avoid the contract for non-disclosure.

At first instance,92 Waller J felt bound to accept Pine Top's submission that it was enough for the insurers to show that a prudent insurer would have 'wanted to know' or would have 'taken into account' the unknown fact, even though it would have made no difference to his conduct as a result. They also argued that the effect on the actual insurer was irrelevant. The Court of Appeal93 proposed a slightly different test: if the insurers wished to avoid the contract, then it must be shown that not only would a prudent underwriter have 'wanted to know' the undisclosed fact, but also that he would have regarded the it as increasing the risk; he does not, however, have to act differently.94 This does not appear to be, with respect, a very sensible test because it is difficult to imagine the prudent underwriter not acting differently if the risk has definitely increased.95

On further appeal, the majority of the House of Lords, led by Lord Mustill, decided firmly that the decisive influence test should be rejected. There was strong dissent from the minority, Lord Templeman and Lord Lloyd, who both suggested that nothing could be construed as being decisive if the insurer would not acted differently, but their argument did not hold sway. This, I think, is highly regrettable. The main reasons given by the majority for the rejection of the 'decisive influence' test were as follows: First, Lord Mustill discusses the difficulties facing both the Court and the prospective 'insured & insurer', if they have to decide before the risk is underwritten whether one particular fact, if undisclosed, will be decisive on the terms of the contract.96 This is surely to misunderstand the issue. The prospective insured does not sit in conference with his underwriter to discuss all material facts, nor does he consciously sit down and think to himself: "if I do not disclose this fact, will it make a difference to the risks?"97

Secondly, Lord Mustill says: "The argument for Pan Atlantic demands an assumption that the prudent underwriter would have written the risk at the premium actually agreed on the basis of the disclosure that was actually made. Yet this assumption is impossible if the actual underwriter, through laziness, incompetence or a simple error of judgement, has made a bargain which no prudent underwriter would have made, full disclosure or no full disclosure. This absurdity does not arise if the duty of disclosure embraces all materials which would enter into the making of the hypothetical decision, since this does not require the bargain actually made to be taken as the starting point".98 This must be considered irrelevant. What can it matter what the actual underwriter would/might/should have done? The whole point of a prudent underwriter test is to bring objectively and dispense with such subjectivity - if the prudent underwriter would not have made the bargain on the same terms without the non-disclosure, then we can surely assume that he would not have made it had the fact been disclosed. If this is the case, then the fact is material on the decisive influence test and that is an end to it. However, if the starting point for such a decision is not to be the bargain actually made, then where is it to be? "There is surely no other place to start, nor probably to contemplate or finish".99

Lord Lloyd, for the minority, has little difficulty in dismissing these arguments and presenting a different line of reasoning which leads to a different conclusion.100 He asks what is the central question, ie the meaning of the words 'would influence the judgement of a prudent insurer' and gave the following answer: if I ask myself what the phrase as a whole means, I would answer that it points to something more than what the prudent insurer would want to know or take into account. At the very least, it points to what the prudent insurer would perceive as increasing or tending to increase the risk.101

Lord Lloyd then analyses the phrase word by word, and not only reaches the same conclusion, but carries it one stage further. 'Influence' in its ordinary meaning is to affect or alter. Most of us would agree with this. 'Judgement' can have many meanings and is the most difficult to define out of context but, as he points out, in a commercial sense it is often used to mean 'assessment' as in the term 'market assessment'. This usually means a judgement as to what the market is going to do, not the process of arriving at that opinion. The word 'would' does not and, in my view, cannot mean 'might'. It is a much more positive word than 'might'.102 It must be observed that Sir MacKenzie Chalmers, who drafted the 1906 Act, was an extremely precise draftsman - if he meant 'might', we can safely assume that he would have drafted 'might'.

In short, Lord Lloyd is simply saying that nothing can be properly described as influencing anything unless it does actually have a positive effect on behaviour and it is surely very difficult to disagree with this analysis.103 Lord Mustill uses Lord Mansfield's statement104 to support the majority's rejection of the decisive influence test. On the grounds that such a test is too lenient on the insured, he describes the duty of disclosure as being of the highest standard and sees no room in Lord Mansfield's judgement for any dilution of it. But this requires and acceptance of the assumption that the decisive influence test is unfair to the insurer, and I do not accept that. Why, in all fairness, should the insurer be allowed to avoid the whole contract, often causing great hardship to an innocent insured, when the insurer has effectively suffered no loss? The risk run may be different from that which he supposed, but if he would have taken it without any increase in premium, what right has he to such drastic remedy? I should also point out that the duty of disclosure, as described by Lord Mansfield, and based on his notion of good faith, bears little resemblance to the incredibly wide duty English insurance law has now arrived at, which places an almost impossible burden on insurers.105 Also it is important to remember that Carter v. Boehm involved a contract entered into, at time when communications were inefficient and insurers were not equipped with sufficient means that enabled them to have the needed information, concluded from the questions they put for the proposer.

The American courts derived the duty of disclosure from exactly the same source but have managed to establish a much narrower duty which works perfectly well and is fair to both parties. For Lord Mansfield cannot possibly have meant the duty to be as wide as the one which English Law has today. It is indisputable, because he wished that the notion of good faith on which it is based to be applicable to all contracts, not simply contracts of insurance. To attempt to impose upon all contracting parties such a wide duty would make a nonsense of the very essence of English contract law, particularly in the commercial sector. So to imagine that a Lord Chief Justice as commercially aware as Lord Mansfield would propose such a step is inconceivable.106

Several other reasons might be suggested for preferring a narrower duty. Firstly, it is not easy for any insured to discuss what would affect the reasonable insurer's mind. Indeed, the insured would have to possess extraordinary powers of perception for him to be able to distinguish which facts a prudent insurer would consider to be material. Secondly, in view of the fact that the insurance market often spans national boundaries, it is not advisable to impose a wide duty of disclosure on the insured.

Thirdly, one must remember, especially nowadays, that insurers are not small-detached firms totally oblivious of current business and social trends. Modern insurance is big business. Like any other large corporation, insurers have within their organisational infrastructure professional back-up staff whose specialised duty is to collect and analyse market data, statistical profiles, claims records and the like. In fact, within their reach are so many sources of data, which other small enterprises, let alone the lay public, are often not aware of.107 As is known in modern insurance practice, decisions to accept or reject insurance frequently depends nowadays as much upon [such] statistical data as in previous claims experience of the proponent for insurance. In light of this, there should not be any compelling need to extend the scope of the insured's obligation.

Fourthly, the wider test of materiality would have led to the absurd scenario of an insured having to furnish volumes of facts about his personal affairs on the firm's business matters, lest there should be any undisclosed fact which an unscrupulous insurer may pounce upon in the event of a claim and maintain that it would have been taken into account, even though the same insurer might be hard put to actually assert that it would be material to his final decision. Obviously, some constraints have to be imposed for the rule to be practicable. In this respect, one should take note of the fact that the original intention of this rule most assuredly was not to fix the insured with an obligation to reveal every circumstance in the past that might conceivably be of interest to the insurer and its officers.108

Fifthly, one needs to consider the overall conduct of the insured, like in the Pan Atlantic case, the bona fides of the insured remained unscathed even under the intense scrutiny of ensuring investigations. Its then grossly unreasonable to expect the hapless insured to "carry the burden of a very substantial loss for no reason better than because of its failure to volunteer to the insurer the previous associated fire claim and the subsequent decision for administrative purposes, not to renew insurance".109 The insured took out a policy, he paid the premium, there was no complaint made of any of his answers and no foul play could be detected in the accident. In such a situation, to deny liability on some convenient claim of non-disclosure reflects poorly on the insurer's good faith in underwriting the risk. Turning the tables on the insurer, one might even go so far to suggest that rather than imposing an impossible obligation on the insured to replay his entire history, the responsibility should fall on the insurer to pay more heed to the questions enumerated in the proposal forms. The insurer ought to realise that mutual good faith enjoins him to be careful about the phraseology used in the proposal form.110

Sixthly, how can it be said that the consent of the insurer is violated and that the contract should therefore be avoided, if he would have made the same contract on the same terms, even if there had been no misrepresentation or non-disclosure?111.

Lastly, it is obvious to few, outside the industry why, insurers should be better placed than other men of commerce to avoid or end their contract without performance. It is widely believed that the present law encourages insurers to use non-disclosure as a technical defence to refuse a claim when they have other reasons for non-payment to the society including, but not only, a suspicion of fraud. Moreover, is it not fundamental to the society and the law that serious consequences should be visited on its citizens not according to the instincts of insurers or journalists but on evidence that satisfied the appropriate onus of proof?112

On a more positive note , it would appear, that the Scottish courts have not rejected the decisive influence test ( See Samuel Hooper v. Royal General Insurance Co. Ltd. [1983] SLT 679 ) . It has to be hoped that if and when they get the opportunity, they will prefer the approach of Lords LIoyd and Templeman , mention above , and reject that of Lords Mustill , Goff and Slyun.

Footnotes

  1. Carter v. Boehm ER 96 KB 342 at 343.
  2. London v. Mansel [1879] 11 ch D 363 at 367.
  3. Rozanes v. Bowen [1928] 32 LIL Rep 98 at p. 102.
  4. Joel v. Law Union and Crown Insurance Co. [1908] 2 KB 863, CA (Life Insurance) per Fletcher Moulton L J, at p890.
  5. Lee v. British Law Insurance Co. Ltd. [1972] 2 Lloyd's Rep 49, CA (personal accident insurance) per Karminski L J at p. 57. "Full disclosure of the very essence of the contract".
  6. MacKencer v. Feldin A G [1967] 2 QB 590, appears to have decided to the contrary, but is distinguishable.
  7. John Bird, Modern Insurance Law (4th ed., Sweet & Maxwell, London, 1997.)
  8. R A Hasson, 'The Doctrine of Uberrina Fides in Insurance Law - A Critical Evaluation, [1969] 32 MLR 615. See also Hasson, [1975] 38 MLR 89.
  9. Pan Atlantic Insurance Co. Ltd. and another v. Pine Top Insurance Co. Ltd. [1994] 2 ALL E R 581.
  10. John Bird and Norman J Hird, 'Misrepresentation and Non-Disclosure in Insurance Law - Identical Twins or Separate Issues?', [1996] 59 MLR 285.
  11. Ibid.
  12. Supra 76.
  13. Ibid. pp. 610 (para e)-618 (para b). He also appears to accept here that marine insurance may have been different with its own rules and principles "which is something completely strange".
  14. Norman J Hind, 'Insurance British Business Law', [1995] J.B.L. 194.
  15. Ivanmy, General Principal of Insurance Law (3rd ed.)
  16. E R Hardy Ivanmy, Marine Insurance Act 1906 (10th ed., Butterworths, London, 1993.)
  17. London General Omnibus Co. Ltd v. Holloway [1917] 2 KB, CA at p. 85
  18. Supra 73 at p. 885.
  19. Seaton v. Burnard [1899] 1 QB 782 CA (Solvency Insurance) per Romer L J at p. 793.
  20. Supra 73 per Lord Fletcher Moulton L J at p. 890.
  21. Supra 76.
  22. A D M Forte, 'The Materiality Test in Insurance', [1993] LMCLQ 557.
  23. [1908] 2 KB 863.
  24. Godfrey v. Britannic Assurance Co. Ltd. [1963] 2 Lloyd's Rep 515.
  25. Asfar and Co. v. Blundell [1896] 1 QB 123 CA (Marine Insurance) per Lord Eslem M R at p. 129.
  26. Ibid. per Kay L J, at p. 133.
  27. Supra 73 per Vaughan William's L J at p. 878.
  28. Ionides v. Pender [1984] LR 9 QB at p. 537 per Blackburn J.
  29. Supra 93, at p. 529, per Roskill J.
  30. For further explanation, see post p. 35, the position in Scotland.
  31. [1908] 2 KB 863.
  32. Ibid., per Fletcher Moutlon L J at p. 884.
  33. McNair J in Australia and New Zealand v. Colonial and Eagle Wharves Ltd. [1960] 2 Lloyd's Rep 241 and 252.
  34. Supra 76.
  35. [1994] 2 ALL E R 581
  36. Malcolm Clarke, 'Failure to Disclose and Failure to Legislate: is it material?', [1988] J.B.L. 206.
  37. Blackburn v. Vigors [1887] 12 App Cas, 531 at p. 537 per Lord Halsbury L C (insurance).
  38. Supra 102 p. 254.
  39. Regina Fur Co. Ltd. v. Bossom [1957] 2 Lloyd's Rep 466 at p. 484.
  40. For further discussion see post p. 64, 'the imputed knowledge'.
  41. Supra 105.
  42. Supra 102.
  43. London General v. General Marine [1921] 1 KB 104.
  44. Ibid., at p. 110, see also Warrington L J (p. 111) and Younger L J (p. 113).
  45. Supra 105.
  46. Reynolds v. Phoenix Assurance Co. Ltd. [1973] 2 Lloyd's Rep 440.
  47. [1963] Lloyd's Rep 515.
  48. Ibid. at p. 532.
  49. Lee v. British Law Insurance Co. Ltd. [1972] 2 Lloyd's Rep 49 at p. 55 per Davies L J.
  50. Banque Financiére de la Cité S A v. Westgate Insurance Co. Ltd. [1961] 2 AC 249.
  51. Supra 91.
  52. Rivaz v. Gerussi [1880], 6 QBD 222; Tate v Hyslop [1885] 15 QBD 368.
  53. Life Association of Scotland v. Foster. [1873] 1 M 351.
  54. Supra 91.
  55. Samuel Hooper v. Royal London General Insurance Co. Ltd. [1993] 5 LT 679.
  56. Ibid. at p. 359.
  57. Lain MacNeil, Scots Commercial Law ( 1st ed., Butterworths, Edinburgh, 1997), Edited by Professor A D M Forte.
  58. Supra 76.
  59. Supra 91.
  60. Section 18(2) provide "Every circumstances is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk".
  61. Supra 124 at p. 699 per Lord McCluskey. Note also p. 691 per Lord Kirkwood.
  62. ABI Statement of long-term insurance practice [1986].
  63. Henry Brooke, 'Materiality in Insurance Contracts', [1985] LMCLQ 615.
  64. Supra 91.
  65. ER 96 KB 343.
  66. Gabriel Smith, 'Non-Disclosure of Material Facts', [1958] J.B.L. 259.
  67. Ibid.
  68. Dawson Ltd v. Bonnin [1922] 2 AC 413.
  69. North British & Mercantile Insurance Co. Ltd. v. London, Liverpool & Globe Insurance Co. Ltd. [1877] 5 ch D 569 at p. 577.
  70. Raynor v. Preston [1881] 18 ch D 1 (CA), per Brett L J at p11.
  71. Rozanes v. Bowen [1928] 32 LIL Rep 98.
  72. Re Yuger v. Guardian Assurance Co. Ltd [1912] 108 LT 38.
  73. Supra 135.
  74. Equitable Life Assurance Society v. General Accident Assurance Corp. [1904] 12 SLT 348, 349 per Lord Pearson.
  75. Ionides v. Pender [1874] L R 9 QB 531 at pp. 538-539.
  76. London General Omnibus v. Holloway [1912] 2 KB 72, 77 per Vaughan William's L J. See also Cantiere Meccanico Brindisino v. Janson [1912] 3 KB 452, 467 per Fletcher Moulton L J.
  77. Beger Ltd v. Pollock [1973] 2 Lloyd's Rep 442 at p. 463.
  78. CTI v Oceanus [1984] 1 Lloyd's Rep 476.
  79. Khan, 'A New Test for Materiality in Insurance Law', [1986] J.B.L. 37.
  80. Malcolm Clarke, 'Failure to Disclose and Failure to Legislate: is it material? - II', [1988] J.B.L. 298.
  81. Anthony Diamond, 'The Law of Marine Insurance - has it a future?', [1986] LMCLQ 25.
  82. Condition and Exceptions in Insurance Politics, 1957, Cmnd 62.
  83. Ibid. para 4.
  84. Ibid. para 4.
  85. Malcolm Clarke, 'Insurance Contracts and Non-Disclosure', [1993] LMCLQ 297.
  86. Pan Atlantic Insurance Co. Ltd. v. Pine Top Insurance Co. Ltd. [1994] 3 ALL E R 581 HL.
  87. Supra 147.
  88. ER 96 KB 342
  89. Supra 85.
  90. Henry Brooke, 'Materiality in Insurance Contracts', [1985] 1 LMCLQ 437.
  91. [1993] 1 Lloyd's Rep 496.
  92. [1992] Lloyd's Rep 101.
  93. [1993] 1 Lloyd's Rep 490.
  94. Ibid. per Steyn L J at pp. 505-506.
  95. Supra 76.
  96. Supra 155 per Lord Mustill, p. 601. para (a)-(c) , para (j)
  97. John Bird and J Hird, 'Misrepresentation and Non-Disclosure in Insurance Law - Identical Twins or Separate Issues?', [1996] 59 MLR 285.
  98. Ibid. at 601 , para (d).
  99. Supra 166.
  100. Lord Lloyd has been very consistent on this issue. As Lloyd J he was the judge at first instance in CTI [1982] 2 Lloyd's Rep 178, where he presented an argument very similar to the one presented here for the minority.
  101. Pan Atlantic, Supra 153 p. 626, para (e), see also Robert H Brown, Marine Insurance, vol. 3 - Hull Practice (Witherby & Co. Ltd., London.)
  102. See Lord Mustill's later analysis on inducement requirement , particularly p. 610 & 611, para(j) & (a)-(f), where he considers it impossible that Chamlers could have drafted this part of Act either thoughtlessly or carelessly .
  103. Supra 166 at p. 289.
  104. See above p. 22.
  105. Hassan , 'The Doctrine of uberrima fides in Insurance Law ; A Critical Evaluation', [1969] 32 MLR 615.
  106. Supra 166.
  107. Australian Law Reform Commission Report No 120 para 150.
  108. Yeo Hwee Ying, 'Common Law Materiality - an Australian Alternative', [1990] J.B.L. 97.
  109. Ibid.
  110. Re Bradley and Essex and Suffolk Accident Indemnity Society, [1912] 1 KB 415 at p. 430 per Farwell L J where he instructed that insurance companies should set out the terms in the proposal forms and policies clearly and unambiguously, also for more details see A D M Forte, 'Legislation, the Revised Statements of Insurance Law', [1986] 49 MLR 754.
  111. Supra 148.
  112. Supra 154.

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