The principle of good faith
It must be borne in mind that all contracts are based upon mutuality of understanding and while the assured is entitled to every penny in settlement of an admissible claim, so is the insurer entitled to base his approach to claims on the conditions of the contract.
Failing agreement by any other means the only recourse open to the assured is to sue the Underwriter when it becomes the responsibility of the Courts to interpret the terms of the contract.
The Court will base its decision in accordance with established principles of construction. As litigation is both expensive and time consuming, it is most unwelcome to every businessman, and care should be taken in the initial stages of negotiating a contract to ensure that there is complete agreement as to the protection desired by the assured as well as to the willingness of the insurer to grant that protection as expressed in the policy.
It cannot be emphasised too much that the negotiation of the contract is a crucial time in marine insurance particularly because in most cases no proposal forms are used. Many disputes which occur later could have been avoided by a proper understanding of the requirement and intention of the parties to the contract at the outset.
“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 17, Μ.I.Α., 1906.)
When a marine insurance contract is effected the insurer must base his judgment on the information given to him by the prospective assured, or by the broker acting on his behalf. The insurer must make up his mind from the information provided, whether or not to accept the insurance, and, if so, at what rate.
For the assured should emphasised that he would probably have far more detailed information about the risk, and the withholding of circumstances which would mislead the Underwriter would amount to fraud, even though this might happen by mistake without fraudulent intention. The position of the Underwriter was such that he was entitled to place confidence in the assured’s representations without being induced to estimate the risk as if certain circumstances did not exist. On the other hand if the insurer knew a vessel had arrived safely, and accepted insurance on that voyage, the policy would equally be void. “Good faith,” “forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact and his believing the contrary.”
We should notice that the Marine Insurance Act does not say that breach of good faith makes the contract void, but capable of being avoided. A void contract is one unenforceable in a court of law, for example, a copy policy, or one without interest or which waives proof of insurable interest. In other circumstances it is necessary for the courts to decide whether a contract is void.
When a policy may be avoided, the wronged party is entitled to ignore the contract from the time of inception (ab initio), as if it did not exist and the premium should be returned thus establishing the principle that a proper understanding did not exist.
The only exception to the return of premium is where there is a deliberate fraud or illegality as expressed in Section 84 of the Marine Insurance Act, sub-section 3 (a).
(3) In particular
(a) Where the policy is void, or is avoided by the insurer as from the commencement of the risk, the premium is returnable, provided that there has been no fraud or illegality on the part of the assured; but if the risk is not apportionable, and has once attached, the premium is not returnable:
The question of avoidance of the policy normally arises on presentation of a claim, when initially the insurer will repudiate liability pending a thorough investigation of the circumstances giving rise to the avoidance. The policy, however, remains legally valid so that the assured can obtain a ruling of the court if he wishes to press his claim. Unless the assured agrees he has erred, and returns the policy for cancellation by agreement so that the premium can be reimbursed to him, there will remain the question of whether the insurer will waive the avoidance, or even retain the premium on the grounds of fraud. It is noticeable that in the past, when the question of deliberate fraud has come before the courts, insurers tend to win the day, simply because they always have a very strong case before venturing to the courts on such a disagreeable issue.
It is noticeable that the Marine Insurance Act does not provide any redress against the insurers for a breach of good faith on their part, other than a return of premium to the assured by reason of the contract becoming tainted. Avoidance of the policy and the return of premium may well constitute entirely sufficient relief for the assured if he becomes aware of the taint before the occurrence of the contingency against which he has intended to insure. If, however, he becomes aware of it only after the occurrence of the contingency, relief of this nature may be quite inadequate. In two cases in recent years parties who have had an interest in the subject matter insured have sought compensation through the Courts for financial loss suffered as a result of negligence on the part of Underwriters.
Insurance is uberrimae fidei (of the utmost good faith) a doctrine which needs to be distinguished from that of caveat emptor (let the buyer beware).
Takis Kalogerakos
Marine Underwriter
