The Duty of Utmost Good Faith in Insurance Law: Where Is It in the 21st Century? the Historical Background of Good and Bad Faith Continues to Develop in English Law, Especially in Two Recent Maritime Cases

The historical background of good and bad faith continues to develop in English law, especially in two recent maritime cases THE duty of good faith in insurance law, first enunciated by Lord Mansfield in 1766 in Carter v. Boehm, predates coming into existence of United States. Yet, more than 200 years of English legal history have not solved all problems that arise from lack of good faith of insureds and sometimes of insurers and ingenuity of their legal advisers. As recently as 1996, House of Lords were split 3-2 over fundamental questions on duty of disclosure. Two important recent English decisions-The Star Sea 1 and The Mercandian Continent, 2 which concern marine insurance but are of general application to all forms of insurance and reinsuranceaddress this issue: Does duty of good faith continue after making of contract of insurance, and if so what are consequences if it is breached? A LOOK AT HISTORY In Carter v. Boehm, Lord Mansfield said: Insurance is a contract of speculation. The special facts upon which contingent chance is to be computed lie most commonly in knowledge of assured only; underwriter trusts to his representation and proceeds upon confidence that he does not keep back any circumstance in his knowledge to mislead underwriter into a belief that circumstances do not exist. The keeping back of such circumstances is fraud, and therefore policy is void. Although suppression should happen through mistake, without any fraudulent intention, yet still underwriter is deceived and policy is void; because risque run is really different from risque understood and intended to be run at time of agreement. . . . The policy would be equally void against underwriter if he concealed. ... Good faith forbids either party, by concealing what he privately knows to draw other into a bargain from his ignorance of fact, and his believing contrary.' Carter v. Boehm concerned pre-contractual duty of disclosure. Lord Mansfield did not consider duties of parties to one another after contract had been made. Most of 19th century cases concern breaches of duty of good faith by reason of non-disclosure or misrepresentation at time of making of contract. It was understood to be law, however, that there was no obligation on an assured to disclose to underwriter facts material to risk that came to assured's knowledge after contract was made.4 MARINE INSURANCE ACT 1906 The Marine Insurance Act 1906 (MIA), as its name suggests, is generally confined to marine insurance. However, House of Lords has held that Sections 17 to 20 of MIA codify common law and apply to all forms of insurance and reinsurance.5 Section 17 of MIA provides: A contract of marine insurance is a contract based upon utmost good faith, and if utmost good faith be not observed by either party, contract may avoided by other party. Sections 18-20 of MIA address pre-contractual duty of good faith at more length. Section 18 deals with disclosure by assured, Section 19 with disclosure by agents to insure, and Section 20 deals with misrepresentation. CONTINUING DUTY? Does duty of utmost good faith continue after contract is made? Sections 18 and 20 of MIA both refer to situation continuing before contract is concluded. Section 17 contains no such limiting language. A. The Litsion Pride In Black King Shipping Corp. v. Massie (The Litsion Pride), Hirst J. said that the duty of utmost good faith applied with its full rigour in relation to giving of information by assured to underwriter about voyage of a vessel under a policy that required giving of such information.6 In this case, assured ship owners failed to disclose to underwriters that vessel was about to enter a dangerous part of Persian Gulf so as to avoid having to pay a higher war risks premium. …